Is the first £30,000 of your redundancy package really tax free?

With the current credit crunch, some employers are considering reducing their work forces.

If you are an employer in this unhappy position then professional employment advice should be taken at the outset. If some employees are to be made redundant then both legal and tax issues should not be overlooked.

There is a common misconception that the first £30,000 of any payout to employees leaving the business can be made free of tax. Unfortunately it is not that simple, as a number of issues need to be considered, including;

Is the employee retiring and the payout a retirement package?
Is there an express or implied contractual obligation to pay the money?
Is the money being paid in return for something, such as a restrictive covenant?
Is the payment a terminal bonus?

If the payout does not fall under one or more of these, then it may well fall under the tax rules for genuine redundancy payments, with the result that the £30,000 tax free exemption will apply.

A wholly voluntary payment at the ending of an employment will be classed as genuine compensation for redundancy and qualify for the £30,000 tax exemption.

Tip: Before dismissing any employees or announcing redundancies take advice to cover the employment and tax issues. Attention to detail at the outset can help avoid the tax pit falls and possibly identify significant tax savings.