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EIM13760 | Termination payments and benefits: redundancy payments: statutory redundancy payments and approved contractual payments

From HM Revenue & Customs · Employment Income Manual

With effect from 6 April 2018, some termination payments and benefits are chargeable to income tax as general earnings and do not benefit from the £30,000 threshold available in section 403 ITEPA 2003.

EIM13874 defines the term ‘relevant termination awards’ and explains that relevant termination awards are split into 2 elements:

Statutory redundancy payments and approved contractual payments to the extent they are exempted by section 309 ITEPA 2003 (see below) are not within the definition of ‘relevant termination awards’ (see EIM13874) and so are not subject to PENP. These payments are always chargeable to income tax as specific employment income and benefit from the £30,000 threshold available in section 403 ITEPA 2003.

Statutory redundancy payments

A statutory redundancy payment made under:

  • the Employment Rights Act 1996, or

  • the Employment Rights (Northern Ireland) Order 1996

is exempt from liability to tax as earnings, within the definition given by section 62 ITEPA 2003 (see EIM00515) but falls within section 401 ITEPA 2003 as specific employment income (see EIM00512).

In practice there's unlikely to be tax payable under section 401 ITEPA 2003 because most statutory payments are less than the £30,000 threshold (see EIM13505). However all payments in respect of a termination, excluding post-employment notice pay (see EIM13874), must be added together in applying that threshold (see EIM13530).

Approved contractual payments

Approved contractual payments are defined at section 309(4)-(6) ITEPA 2003.

Under Section 309(1) ITEPA 2003, the part of any approved contractual payment which would have been due if a statutory redundancy payment had been payable is exempt from a charge to tax as earnings. This part of an approved contractual payment is chargeable to income tax only as specific employment income and benefits from the £30,000 threshold available in section 403 ITEPA 2003.

Section 309(2) ITEPA 2003 provides that where an approved contractual payment exceeds the amount which would have been due if a statutory redundancy payment had been payable, the excess is liable to income tax. This element of an approved contractual payments falls within the definition of a ‘relevant termination award’ for PENP purposes.

Where the excess of an approved contractual payment is liable to income tax, this will generally be as earnings from the employment as defined by Section 62 ITEPA 2003 (see EIM00515),depending on the specific facts.

Background

A statutory redundancy payment is due where an employee is made redundant with at least 2 years’ service. This includes an employee working under a fixed-term contract agreed, renewed or extended since 1 October 2002. Office-holders such as directors qualify if they work under a contract of employment. The Employment Equality (Age) Regulations 2006 removed the upper age limit of 65 but not the age-banded method of calculating payments (see below). Members of the armed forces, Parliamentary staff, Crown servants and some others cannot qualify.

A statutory redundancy payment is due only where the employee is dismissed (as compared with resignation). For this purpose, an employee volunteering for redundancy is dismissed. If the employee leaves before the redundancy date by agreement, payment remains due.

Statutory redundancy pay is calculated as the total of:

  • for each complete year of service where age during year less than 22, ½ a week’s pay

  • for each complete year of service where age during year is between 22 and 40, 1 week’s pay

  • for each complete year of service where age during year is 41+, 1½ week’s pay

NB

  • service longer than 20 years does not count

  • a “week’s pay” is the amount due under the employment contract on the date that the minimum notice of termination was or should have been given. The minimum is 1 week per year of service up to a maximum of 12 weeks. A week’s pay cannot exceed a specified figure. (£350 from 1 February 2009; £380 from 1 October 2010 (note the exceptional date); £400 from 1 February 2011; £430 from 1 February 2012; £450 from 1 February 2013; £464 from 6 April 2014; £475 from 6 April 2015; £479 from 6 April 2016; £489 from 6 April 2017; £508 from 6 April 2018; £525 from 6 April 2019; £538 from 6 April 2020; £544 from 6 April 2021; £571 from 6 April 2022; £643 from 6 April 2023; £700 from 6 April 2024)