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Business Doctor: Some redundancy pay can be tax-free

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TC writes: We are about to make a number of people redundant and are preparing their final payments. As part of their leaving arrangements we are offering them up to £500 towards training courses. Can any of this be paid out tax-free?

Up to £30,000 can be paid in redundancy without deducting tax, writes Jon Sutcliffe, partner at Kingston Smith LLP. This can consist of cash and other benefits to reach the £30,000 limit.

However, the rules for paying up to £30,000 without deduction of tax are complex and you should take advice if you have any doubts.

First of all, ask yourself why the benefit or extra payment is being made. In short, if the amount is not contractual or an employer custom but is genuinely part of the redundancy package, it should not be subject to tax and national insurance contributions (Nics) as long as the total is below £30,000.

If the total package is less than £30,000, you do not need to report it to HM Revenue & Customs (HMRC). If the package exceeds £30,000 and includes cash and benefits, then a report must be filed with HMRC by July 6, following the end of the tax year. If the amount is entirely cash, no report is required, but any cash element that exceeds £30,000 will need to be processed through the payroll.

If the payment is made before issuing a P45 form, it should be treated as additional salary and is subject to PAYE but not Nics unless the payment is contractual. For payments after the issue of form P45, payroll is operated with the code OT on a “month 1/week 1” basis and no Nics are payable.

For taxable benefits provided before leaving employment, the benefit has to be reported on form P11D in the usual way.