Facing redundancy can certainly be challenging, but it might not necessarily be all doom and gloom. Getting to know just what you need to look out for can be the key to turning a tough situation into a more manageable one.
With the coronavirus pandemic leading to a turbulent socio-economic environment, it’s perhaps becoming more important than ever to take care of your finances.
We’ve all seen the recent news stories about growing job losses, and sadly, it’s a reality that some of us may have to face. And with the Coronavirus Job Retention Scheme (CJRS / Furlough) coming to close at the end of October - being replaced by a new government support package - it may be that we continue to feel these impacts.
Such challenges force our hands when it comes to our personal finances. Of course, redundancy makes that prospect even more unwelcoming. Sometimes in life, we need to take some time to evaluate our financial security.
With that in mind, Niche's Managing Director and Chartered Financial Planner, Matt Wiltshire, has provided clarity for anyone facing the possibility of redundancy. He’s taken a look at what you’re entitled to and what you are taxed on, so you can begin to look to life after redundancy.
What am I entitled to?
For many of us, redundancy is a new prospect, and the process may seem a little confusing. Hence, it is vital that you are informed about just how much you may or may not be entitled to in the event of redundancy.
“If you have been working for your current employer for more than two years, you are entitled to statutory redundancy pay. For each full year you’ve been working for your employer, you’ll receive an amount of pay calculated from your age, wage and how long you have been employed by your company.”
Below is a breakdown of how many weeks pay you'll receive for each year of employment:
Your weekly statutory redundancy payment is capped at a maximum of £538, whilst your overall entitlement is limited to £16,140, and you are only entitled to be paid for a maximum of 20 years. Given the current climate whereby many affected individuals may be receiving a furloughed wage, statutory redundancy payments are modelled off your original salary sum, as opposed to your CJRS manipulated wage.
However, its also important to consider what you are entitled to in regards to contractual redundancy pay.
“This is down to the discretion of your employer, and it depends what is written into your individual contract of employment. However, the law states that contractual redundancy pay cannot be less than your statutory redundancy pay. It is also important to check that you are paid all of the money you’re entitled to, including holiday pay, outstanding bonus, commission or expenses you’re owed.”
How much tax will I have to pay?
After you’ve uncovered what you are entitled to from your redundancy, the next challenge is to understand how much of your sum you will lose to taxation. Indeed, the rules around the tax free allowances can often seem convoluted.
Matt provides some clarity:
“Statutory, contractual and non-contractual redundancy payments are exempt from tax up to £30,000. However, your employer will deduct tax and National Insurance contributions from any outstanding wages or any payment in lieu of your notice period if necessary - not redundancy payment.”
“Any redundancy pay or assets you are entitled to exceeding £30,000 are liable to taxation, and are calculated using your marginal rate of tax.”
“If you were a basic rate taxpayer, you would be liable to 20% tax on this excess payment, but this payment could cause you to breach the basic rate tax band. At this point, you may be liable to higher rate tax or even the additional tax rate depending on your income.”
Let’s consider an example and see how this would look in practice:
David is a basic rate tax payer earning £42,500. He has been offered a redundancy settlement amounting to £32,000. He was allowed to keep his company car and computer with a total value of £10,000 – the value of these assets are added to the redundancy payment. This amounts to a total of £42,000 before any tax reductions.
The first £30,000 is tax free, so it’s only the £12,000 that will be liable to tax deductions. This is the breakdown of the taxable £12,000, following the standard 0T tax code (taxed at 20% up to £37,500, and 40% between £37,500-£150,000):
- £7,500 taxed at 20% = £6,000
- £4,500 taxed at 40% = £2,700
So, you will pay £3,300 in income tax (as £12,000 becomes £8,700 after tax), and will take home a total redundancy settlement of £38,700.
However, Matt explains how it may be possible to reduce the amount of tax you’re eligible to pay on your redundancy package:
“Many companies will be in a position to deliver your redundancy pay in instalments which may result in you being able to receive it in different tax years, resulting in a lower percentage of tax to pay."
"Another possible alternative would be to consider paying some of your taxable settlement into a pension plan. If you are a member of your employer’s pension scheme and you are going to receive a redundancy payment of more than £30,000, then you may be able to avoid paying tax on the excess by asking your employer to pay it into your pension, provided they agree to this.
Paying anything taxable (over £30,000) into your pensions could be a great tax efficient way of using some of your redundancy. You can put the lesser of £40,000 or this year's income (which will include the value of the taxable redundancy payment) into a pension. If your income is greater than £40,000 you may be in a position to 'carry forward' some previous years' allowance to make a greater contribution.”
Matt’s key words of advice are:
“Considering your own financial circumstances before making any decisions about your redundancy payment is crucial. A blend of the above options may result in you being able to retire early, clear a debt you may have, or invest in your future in other ways. Speaking to an adviser could grant you comfort that you are making the most out of your redundancy pay.”
If you have any further questions or would like more information regarding any part of the redundancy process, please don’t hesitate to contact us.
Call: 01633 859555
Office: 5 & 6 Waterside Court, Albany St, Newport, NP20 5NT
Disclaimer: This article does not constitute financial advice. All information was correct at the time of writing.