Businesses must consider tax implications of redundancies says Crowe

Rob Gunn, tax partner at Crowe in the Midlands at Oldbury, said: “Lessons need to be learned from the financial crisis back in 2008, when employers had to make redundancies while trying to manage through the recession.

“Many employers did not apply the correct tax and National Insurance contributions treatment to their termination payments, resulting in these unexpected tax bills.”

While redundancies are predominantly an employment law issue, several changes to the income tax and NICs treatment over recent years, mean that special attention should be paid to ensure the tax and NICs position is correct.

Caroline Harwood, head of share plans and employment tax at Crowe, said: “The current £30,000 tax-free exemption for termination payments, has led to many businesses assuming all related payments are tax-free up to this amount, without first checking whether the type of payment made qualifies for the exemption.

“However, the tax rules in this area are much more complex and require an in-depth look at what the payment is actually for. Employers should assume that the termination payment is subject to tax and NICs, unless there is a certain exemption.

“Additionally, the tax and NICs treatment of each element of the payment can be different depending on what the payment is for, for example, whether it’s linked to rewards or holiday pay, if the payment is for retirement or a registered pension scheme.

“Also, if the employment is terminated before the end of the contractual notice period, a complex calculation must be performed to see if any of the payment is Post Employment Notice Pay, which will be taxable and subject to Class 1 NICs as general earnings.”

Once all of these questions have been taken into account, employers can start to consider whether any amounts fall under the £30,000 exemption. Anything taxable as general earnings (including any PENP) will be subject to Class 1 NICs and any other amounts subject to income tax (for example, termination payments in excess of the £30,000 exempt amount) will also be subject to Class 1A NICs.

This demonstrates the complexity of the tax and NICs treatment of redundancy payments and does not consider how these rules interact with the Coronavirus Job Retention Scheme (CJRS).

It is important that employers are comfortable with ensuring the tax and NICs treatment of any payments are correct before taking these difficult decisions.