As the coronavirus job retention scheme gradually winds down, many business owners are going to have difficult decisions to make about how they operate in the months ahead, and which members of staff they'll be able to keep on board.
Despite the latest phase in Government support offering employers a bonus to keep staff in employment until the end of January, rising redundancies seem inevitable.
According to the British Chambers of Commerce, 29% of businesses expect to decrease the size of their workforce over the next three months.
Among small and medium firms - those with 10 to 249 employees - that figure rises to 41%.
Making employees redundant is no easy task. From the HR side of things alone, there are complex legal requirements to follow, and when you add tax into the equation, things can get very technical.
Most businesses will require professional advice when calculating redundancy packages, so get in touch with us if you need any support.
How are redundancy payments taxed?
The way redundancy payments are taxed depends on which of two categories they come under:
General earnings an employee would have received if they were still working in the notice period, including outstanding salary or wages, payment in lieu of notice (PILON) if relevant, and any holiday pay. Most of this is categorised as post-employment notice pay (PENP).
Termination payments that relate directly to the termination of employment, including compensation for the employee's loss of office.
If all of the money paid to an employee is classed as PENP or other general earnings, such as benefits-in-kind or accrued holiday pay, the cash value for it is all taxed in the same way as normal earnings. This means it is subject to income tax and National Insurance Contributions (NICs).
If part of the payment falls outside of that category, a £30,000 tax exemption can apply to that portion, making it tax-free for both PAYE and NI purposes.
Any excess above the £30,000 limit is subject to income tax for the employee, and until recently, there was no NICs liability on this part of the termination payment.
As of 6 April 2020, however, new rules have come into play for businesses. Class 1A employers' NICs are now payable on the termination payment in excess of £30,000, at a rate of 13.8%.
Unlike other class 1A NICs associated with taxable P11D benefits, which are payable once a year on 19 or 22 July following the tax year-end, this liability will be deducted through real-time information/PAYE at the time of the termination payment, resulting in additional cashflow pressure.
HMRC will usually charge late payment interest and penalties if it is not paid correctly and on time.
For that reason, it's essential to plan ahead if your business may have to make redundancies in the coming months, and work out what the cost might be.
Calculating the tax due
To calculate the PENP, we use a complex formula that includes basic pay, unworked days in the notice period, days in the last pay period, and termination payments that are liable to income tax.
You are not expected to calculate this yourself, although we can handle this task for you as well as talking you through your options.
Speak to us about termination payments.