Taxation of redundancy payments
Produced in partnership with Sam Whitaker of Shearman & Sterling

The following Tax practice note produced in partnership with Sam Whitaker of Shearman & Sterling provides comprehensive and up to date legal information covering:

  • Taxation of redundancy payments
  • Statutory redundancy pay
  • Enhanced redundancy pay
  • Corporation tax deduction
  • Claims from the National Insurance Fund
  • Redundancy etc paid from the NI Fund
  • Statement of Practice 1/94 and clearances
  • Redundancy and pay in lieu of notice
  • National Insurance contributions

Taxation of redundancy payments

Redundancy is one of five ways in which an employment contract may be terminated unilaterally by an employer where such termination will be potentially a fair dismissal. The other four potentially fair reasons for dismissal are:

  1. the employee is not capable of performing the job

  2. the employee’s conduct is incompatible with continued employment

  3. the employee cannot continue in the job without contravention of a legal restriction, or

  4. the residual category of ‘some other substantial reason’

Section 309 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) provides that ‘no liability to income tax in respect of earnings arises by virtue of a redundancy payment...except where it does so by virtue of Chapter 3 of Part 6 (payments and benefits on termination of employment etc)’. In other words, statutory redundancy payments, and contractual payments made under section 157 of the Employment Rights Act 1996 (ERA 1996) (where trade unions and employers agree that a contractual scheme will override entitlement to redundancy pay—such arrangements are in practice rare), automatically jump into the termination payments box without first having to be inspected to see whether they are ‘chargeable to income tax apart from’ ITEPA 2003 Part 6 Chapter 3. As a result, such redundancy payments are only taxable to the extent that they exceed the £30,000 threshold (see Practice Note: Termination payments qualifying

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