There are different types of payments made to employees when they are being made redundant and they are all treated differently. Some types of leaving payments are tax-free , some taxable in full and others are taxable over £30000. Most redundancy payments are tax free up to £30,000 and are not liable for NICs. Employers must remember that separate rules apply for working out the PAYE tax and NICs due.
For NICs purposes payments on redundancy are either wholly liable to NICs or not liable at all. Outstanding payments for salary and holiday pay are treated as earnings for the purposes of tax and NICs.
To see a list of PAYE tax and NIcs rules covering the most common types of one-off leaving payments, for help with these payments you should read the HMRC publication CWG2 (Employer further guide to PAYE and NICs).
For taxable redundancy payments where you have shown the date of leaving on a previous FPS and have provided the employee with a P45 – the payments must be shown as payments after leaving by completing the following steps:
- Deduct PAYE Tax using code OT on a week1/Month 1 basis.
- Calculate NICs if appropriate – help can be found in HMRC Publication CWG2
- Include this additional payment and the tax deducted on the FPS and in the pay and tax in this period- ensure the revised YTD figures include the additional payment. If you make a payment after leaving in a different tax year the YTD figures on the FPS should only reflect the additional payment.
- Make sure that the employee is given written confirmation of the payment (Payslip , letter or other printable document) which clearly shows the date of the payment, the gross amount, any PAYE Tax or NICs deducted and that the payment is a post-leaving payment.
- The original date of leaving should be put on the payment after leaving and the employee must not be given another P45.