Jennifer Adams considers the tax rules regarding redundancy payments for employed workers who lose their jobs as a result of the Coronavirus.
Despite the support that the government has given businesses via the Coronavirus job retentionscheme (CJRS) many will be looking to make employees redundant, if not immediately then potentially when the furlough scheme ends on 31 October 2020.
Statutory redundancy payments
If so, the usual rule as to what constitutes genuine redundancy and the legal process required still applies. For example, employees made redundant whilst on furlough are still entitled to notice of termination in accordance with their contracts and to a statutory redundancy payment if they have two years’ or more continuous employment, as well as any contractual redundancy entitlement.
The statutory payment amount depends on the employee's age and length of service, capped at 20 years and at £538 a week, with the maximum statutory redundancy payment being £16,140. Any additional payment should be included in the employment contract.
Redundancy packages
Redundancy packages usually comprise two separate elements, namely an amount for 'payment inlieu of notice' (PILON) and redundancy pay (i.e. payment for the employer breaking the contract). Should there be a PILON clause in the employee's contract, the employer must make payment of all monies that the employee would have received during the notice period and tax as earnings, to include National Insurance contributions (NICs).
If there is no PILON clause, there is a complex statutory formula (‘post-employment notice pay' (PENP)), which is used to calculate the amount of a payment that should be taxed as earnings. The calculation is based on the employee’s basic pay and the number of days (or months) of unserved notice. Any payment above this amount is still taxable but subject to the £30,000 exempt redundancy amount (see below).
Whether contractual or not, under the Coronavirus rules the amount is based on an employee’s pre-furlough salary. Note that employers cannot reclaim either PILON or redundancy payments under CJRS.
The £30,000 exemption
Provided that a payment or benefit is not a distribution or part of a capital transaction, the first £30,000 of any redundancy payment is exempt from income tax and NICs, with only the balance being chargeable. Non-cash benefits are also considered when calculating the £30,000 exempt amount where the value used is the cash equivalent or 'monies worth' if higher (e.g. if an employee keeps a company car as part of the termination package the market value of the car will be taken into account towards the £30,000 exempt amount). Some benefits-in-kind are exempt from tax anyway (e.g. the provision of a mobile phone) and as such are not taken into account.
Employers deduct and account for any tax and NICs due under PAYE real time information. If the total value of the termination package is less than £30,000, no form P11D declaration is required;therefore a P11D will only include the value of benefits up to the date of termination.
Although the employer must assess and report packages valued in excess of £30,000, the actual tax charge may not arise at the date of termination because a cash payment is treated as received only when it is paid or when the recipient is entitled to the payment. A package greater than £30,000 andpaid by instalments will therefore be taxed as and when received and consequently the tax and NICsmay arise in a year later than the termination date. Non-cash benefits are treated as being received only when they are ‘used or enjoyed’.
Practical tip
A PILON is not recoverable under CJRS. Employers contemplating redundancies may prefer to retain employees on furlough during the notice period, so that at least some of the notice pay can be claimed under CJRS
