This is a difficult time for all employers and many employees as the economy slows significantly, or even grinds to a halt, in all but a few essential sectors. The UK’s business community is complying with the coronavirus measures enacted through the Coronavirus Bill and Coronavirus (Scotland) Bill. When difficult decisions around unavoidable redundancies are made, it is essential to manage this correctly for the benefit of all concerned.

The support provided through the Coronavirus Job Retention Scheme is a welcome lifeline to businesses, with most employers furloughing staff to benefit from the financial relief available through the scheme. Although it is hoped that such measures will help to save thousands of jobs which would otherwise have been lost during this difficult period, there will inevitably be some businesses who just cannot avoid making some staff redundant and we are starting to see that happening.

Dealing with staff redundancies is extremely hard for any business on the human side - these are individuals who are losing their jobs, many of them having been close colleagues for many years. However, there are also the legal and HR aspects to get right (the support of an employment lawyer is firmly recommended with this) which can be equally as challenging. One area that we often find is forgotten about, or not given enough attention to, is the tax and National Insurance Contribution (NIC) implications of making redundancy payments to staff. Getting this side of things right, and maximising any exemptions that are available, can make a significant difference to the amount of money paid to the employee being made redundant. There can also be significant implications for the business if they make mistakes on the tax and NIC treatment, therefore it is vitally important to give this proper consideration to avoid any costly errors.

The position on statutory redundancy payments is straight forward. Payments paid in accordance with the formula set by the Government for genuine redundancies will always be exempt from tax and NIC. Anything else is covered by a complicated set of tax rules that can be difficult to work through. Typical problem areas include:

• The misconception that all payments up to £30,000 are exempt from tax and NIC. They’re not – the £30,000 exemption only applies if no other part of tax legislation applies first.
• Payments in Lieu of Notice (PILON). All PILONs are now taxed in the same way through the application of a complicated formula to calculate Post Employment Notice Pay. This formula is not for the faint hearted or those who didn’t like Maths at school!
• Settlement agreements. These are legal documents that often have no bearing on the tax/NIC treatment of the settlement package being paid. It is necessary to look behind the agreement, including the contractual terms, to consider the tax/NIC treatment of each separate element of the financial package.
• Implied or contractual bonuses, ex gratia “loyalty” payments and retention bonuses for sticking with the business to a defined date can all be problematic from a tax/NIC perspective.
• Arrangements involving benefits such as cars or medical insurance can also trigger additional liabilities and reporting obligations.

Find out more about the redundancy process and how to use the redundancy calculator on the Government's website.

The Johnston Carmichael Employer Services team is helping employers to work through and manage these complexities for the benefit and protection of both the departing employee and the business. Please get in touch with me if your business is considering redundancies and we would be happy to support you during this time.