Tax trap warning in redundancy payments

Jan 27 2009 by Tom Scotney, Birmingham Post

With job losses increasing, employers could be facing costly showdowns with HM Revenue & Customs, accountancy firm Baker Tilly has warned.

The Birmingham office of the mid-tier accountants and business advisers Baker Tilly said redundancy could be a particularly complex area of taxation for employers to deal with on their own.

Tax partner Bill Longe said: “The maximum amount that can be paid tax-free to an employee due to redundancy is £30,000. This £30,000 exemption can also apply to other payments made to the departing employee, but those sums must be added to the redundancy payment when determining how much is covered by the exemption.

“The exemption for redundancy only includes statutory redundancy payments and payments made under an HMRC-approved redundancy scheme. Any additional payments need to be reviewed to determine whether they qualify for exemption.”

Baker Tilly said payments which do not qualify for the £30,000 exemption include arrears of pay, bonuses or other sums already earned under the contract of employment. Also included is any payment in lieu of notice which the employee is entitled to under his contract of employment.

Mr Longe continued: “Payments in lieu of notice can, however, be exempt in certain circumstances. This is if they are paid because the employment is terminated and the employer has to compensate the employee for what amounts to breach of contract.”

Other taxable payments highlighted by Baker Tilly include compensation for loss of pension rights, pension commutation payments, any other payment that is for past services and any payment that is an inducement to transfer to a new employment, in which case redundancy will not apply.

Mr Longe added: “A payment may not be taxable if it is a genuine ex-gratia payment, a ‘golden handshake’, but such payments tend to be made on an individual basis. An employer looking to make an additional payment to all employees should seek approval for the payment as part of the redundancy scheme.”