QUESTION: In recent years our business has made huge strides to automate certain processes to increase productivity, however as a result there are roles which have become redundant.
We will be looking to retrain these employees in other areas of the business or asking for volunteers for redundancy. To enable us to better inform affected employees, what are the tax implications of redundancy payments?
ANSWER: Redundancy is always a difficult topic of conversation, and while it is predominantly an employment law issue, it is important to enter the process fully informed so as to mitigate any ill-will.
The last thing that employees and you as an employer will want when going through this process is an unexpected tax bill.
This has the potential to be unavoidable when considering the complexities of the income tax and National Insurance Contributions (NICs) treatment of termination payments.
Many make the mistake and think of the £30,000 tax-free exemption for termination payments, assuming that all related payments are tax-free up to this amount.
However, the tax rules relating to termination payments are much more complex and require an examination of what the payment is actually for in practice.
If the payment is linked to the employment the £30,000 tax-free exemption does not apply, this includes payments for rewards, holiday pay, basic pay in lieu of notice, restrictive covenants or other contractual clauses.
The £30,000 tax-free exemption applies to employer pension contributions directly into an employee’s pension fund, legal costs associated with an employee’s contract being terminated, statutory redundancy payments and genuine ex-gratia redundancy payments.
Amounts in excess of the £30,000 exemption, which are subject to income tax, are also subject to Class 1A NICs. This means that the employer must pay NICs on the payment, but the employee does not.
This amount due should be paid through PAYE at the time the termination payment is made. This obviously increases the overall cost of a termination package that employers need to consider.
Grey areas arise where there is pay in lieu of notice that is not considered “basic pay”, for example there are share option gains, employee benefits and bonuses are not usually regarded as basic pay, and hence may be non-taxable.
Also, employee allowances add further complexity, some may not be basic pay for these purposes, e.g. travel or shift allowances, while others usually would be basic pay, e.g. a car allowance.
Where there is any doubt with the correct income tax and NICs treatment of any payments, I would recommend taking specialist advice to mitigate surprising tax liabilities imposed by HMRC.
- KellyAnne Murtagh (kellyanne.murtagh@aabgroup.com) is senior tax manager at AAB Group Accountants Ltd (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.