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Redundancy Payment
The first £30,000 of any redundancy payment is commonly believed to be tax-free. However, this is an oversimplified method since it disregards the diversity among payments made towards the end of employment termination.
Only termination payments totaling £30,000 that are not payments of earnings are free from taxation under HMRC guidelines. Assessing whether the payment is a payment of earnings should be the first step in determining whether all or part of the termination package is exempt from taxation covered by the £30,000 exemption.
What criteria are used to Determine Payments of Earnings?
Payments of Earnings, in general, are monetary disbursements that are paid as part of the employment package. Wages and salaries, as well as other forms of remuneration that are common, practice and may not be included in an employment contract, fall under this category. After employment has ended, all payments that are paid as wages are fully taxable and do not make part of the thirty thousand pound exemption.
Other payments that people must pay taxes on may include compensations, i.e., loss of an employee’s job or failure to give notice, and are taxable payments. But by the approach of Payments of Earnings, these compensations are not earnings and can be covered under the £30,000 exemption rule on employment termination.
What are payments in lieu of notice?
Due to the widespread and informal usage of the phrase “payments in lieu of notice” (PILONs), which can refer to payments with varying characteristics, the handling of “PILONs” can be challenging. There are a number of factors to consider, including the nature of the money being transferred, that will determine whether or not the payments qualify for the £30,000 exemption.
PILON is the word used to indicate when an employee receives payment in place of notice instead of the full notice to which they are entitled. HMRC considers a PILON to be “coming from the employment” and so taxable as earnings whether it is made for in a payment or is a customary payment; hence not claimable under the £30,000 exemption rule. If a PILON can be traced back to the employee’s job, it will be taxed as salary. On the other hand, if an employer fails to give the required notice and compensates the worker for the breach of contractual terms of the employment contract, the money won’t count as wages and can enjoy the exemption.
In certain circumstances, gardening leave is mistaken for PILONs. There is no salary or wage reduction for an employee taking gardening leave; nonetheless, the employee is not expected to work during that notice and is paid full wages for the term he or she is not attending the office. Standard PAYE rules apply to such payments. In addition, if an employer pays an employee for unused holidays, that amount is considered taxable income.
What are Redundancy Payments: Any payments made in connection with a redundancy, whether or not they are statutory, are collectively referred to as “compensation payments.” The maximum tax-free payment for any given termination is £30,000.
