What Are the Financial Penalties Attached to Redundancy?
Being told you are to be made redundant is hard news for anyone to absorb, but it can be even more brutal if there are financial penalties attached to your lump sum.
Many employees take it for granted that their employer pays for perks such as their pension and health care. Losing your job sometimes means not only losing your salary but your financial stability as well.
These few questions should help you calculate whether there will be any financial penalties attached to your redundancy package.
1) How Much Is Your Redundancy Pay?
- A) Over £30,000
- B) Just under £30,000
- C) Less than £10,000
2) What Type of Redundancy Are You Going Through?
- A) I’m being paid three months in lieu
- B) I’m being placed on gardening leave
- C) I’m receiving statutory redundancy pay
3) How Old Are You?
- A) Over 55
- B) Over 50
- C) Under 50
4) Do You Have Any Shares With The Company?
- A) Yes, I am part of its share save scheme
- B) I do have shares but I bought these independently
- C) No shares
5) Do You Have A Company Pension?
- A) Yes, it’s a final salary pension
- B) Yes, it’s a company pension
- C) No pension
Mostly A – You Will Be On The Tax Man’s ListUnfortunately any redundancy payment over £30,000 is taxable and you will have to pay National Insurance. Your payment will be added onto your earnings for the year and taxed accordingly. If you are over 55 years of age HM Revenue & Customs might also view it not as a redundancy package but a retirement package, so again it will be taxable. If you can prove that you intend to carry on working in another job or will still be looking for work they might reconsider.
If you have taken part in your company’s share save scheme you risk losing the opportunity to sell these for the reduced rate you bought them. Companies will normally offer schemes for periods of three, five or seven years, but if you are made redundant even one week before the end of your scheme you will just receive your savings with no added bonus.
Redundancy can also spell bad news for your pension. Company pension schemes can be very generous and each case will be different but if you haven’t been in the scheme long you could risk losing your final salary pension and any contributions your employer has paid.
Mostly B – You Could Have A Few Surprises in StoreAny payments under £30,000 will not be taxable, however if you will need to make sure that your redundancy is classed as statutory redundancy under tax guidelines. Gardening leave or payment in lieu is not classed as redundancy for tax purposes which means any payment, even if under £30,000 will be taxable. If you are over 50 you will also have to show that you intend to continue in the world of employment.
If you have bought company shares independently of the company these should not be taxable, but if they were part of your employment package and you decide to sell, any profit you make could be taxable.
You may also want to ask your employer to place some of your redundancy payment into your pension, instead of receiving a lump sum. This could save you up to 40% in tax if it reduced your redundancy pay to less than £30,000.
Mostly C – You Should Have No Added Financial PenaltiesFrom your answers it sounds like there should be no nasty surprises waiting for you and your redundancy pay should be tax free if it is under £30,000 and it is statutory.
If you have no shares or pension with the company you do not stand to lose what you never had. Having said that it is still important that you receive your P45 when you leave employment, as this will tell you how much you have earned in the tax year. If you leave half-way through the tax year you may not have used up all of your personal tax allowance and you may be due a tax rebate. The rebate will be paid when you join a new employer though.
Being made redundant does not only rid you of your salary, but if can also affect your lifestyle. Employers often entice people in with the promise of added benefits with the company, whether this is a new car or private dental care. These can often add up to 10% on top of your salary.
If you have yet to factor any of these into your financial budget it might be time to look again at your outgoings and recalculate.