Is a Redundancy Payment Tax-Free?

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Is a Redundancy Payment Tax-Free?
A redundancy lump sum within limits is tax-free. (Hemera Technologies/ Images)

In the United Kingdom, compensation for loss of employment is called a redundancy payment. In most cases, workers who are made redundant receive a financial settlement from their employers that includes a statutory lump sum of money. The redundancy lump sum is not part of a pension plan or a retirement agreement. The amount of a statutory redundancy payment is dependent upon the age of the employee, their length of service and their level of pay. A large portion of an employee's redundancy payment is tax-free.

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Lump Sum

Citizens Information states that a statutory redundancy lump sum of money is tax-free. The lump sum can include a statutory loss of employment payment, payment in lieu of notice or other compensation authorised by an employer or the British court system. According to British law, lump sum compensation that does not exceed the limit is tax-exempt.

Tax-free Limit

On January 1, 2011, the United Kingdom placed a limit on the maximum amount of tax-free lump sum redundancy an individual can receive. As reported by Citizens Information, the lump sum compensation cannot exceed 200,000 euros. Lump sum compensation above that limit is taxable.

Tax Exemptions

In addition to the statutory lump sum, an employee is entitled to basic tax-free exemptions. According to Citizens Information, a worker receives either the basic exemption of 10,160 euros plus 765 euros for each complete year of service or the basic exemption plus an additional 10,000 euros. To qualify for the additional 10,000 euros exemption, an employee cannot have received a redundancy lump sum payment during the previous 10 years or receive a lump sum in the future.

Tax Refund

If an employer deducts too much tax from an employee's wages and does not account for the basic exemption of 10,160 euros plus 765 euros for each year of service, an employee can contact a regional Revenue Commissioners office to claim the refund. If the worker received a redundancy lump sum payment, he is required to report that income to the Revenue Commissioners when he applies for a tax refund.

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