Taxation treatment for redundancy pay

OneHalfMortgageFree · 20 October 2019 at 3:15PM

I understand that up to £30k of redundancy pay is non taxable, but is it still regarded as income for tax purposes?

For example, imagine one is made redundant in April and receives no wages but gets £30k redundancy. That whole amount should be tax free. But if that person then earns £95k in the rest of the tax year, is their total earnings for income tax purposes that year £125k (in which case they lose the personal allowance) or is the £30k redundancy treated as something other than income for tax purposes, in which case their taxable earnings are £95k?

Pennywise · 20 October 2019 at 3:36PM

No, the tax free element of the redundancy package doesn't have any impact at all - it's outside the tax return system, so in your example, your income liable to tax (before reliefs, exemptions etc) would be £95k

Just be careful if planning in that usually not all the "lump sum" is tax free. Elements such as accrued holiday pay, accrued bonus, payment in lieu of notice, etc., may all be taxable. It's only the genuinely "ex gratia" amounts that you aren't entitled to as part of your contract of employment that fall under the £30k exemption.

OneHalfMortgageFree · 20 October 2019 at 4:15PM

Thanks a lot - much appreciated

unholyangel · 21 October 2019 at 8:37PM

Non-taxable means its not liable to tax - aka isn't factored in to tax calculations, its basically treated as if it didn't exist. So it doesn't form part of your adjusted net income, which is what tax is calculated on.

It is paid tax free because it is not taxable. I mention this just in case someone else has received something tax free that is taxable income.

Taxation treatment for redundancy pay

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