Posted on: Wednesday 23rd December, 2020
Redundancy payments compensate you if you lose your job when that job no longer exists. Apart from the earnings that are included in a redundancy package, redundancy pay is tax free up to £30,000, and both severance and redundancy payments must be reported to HMRC.
So where do you declare redundancy or severance payments, and what are the implications of failing to record them correctly?
You should record your ‘normal’ earnings on the Employment pages of your tax return, but then go to Additional Information page 2 (Employment Lump Sums) to record details of your redundancy or severance payment.
Up to £30,000 of redundancy pay can be received tax-free, and you record any amount up to £30,000 in Box 9¹ - ‘Compensation and lump sums up to £30,000 exemption.’ If you’ve been awarded more than this sum, you need to record the excess amount separately in Box 5 on the same page.
Also record the ‘tax taken off’ in Box 6 – your redundancy payment should have been taxed by the employing company where necessary. So what could happen if you fail to declare your redundancy or severance payments, or report them incorrectly?
As £30,000 of redundancy pay isn’t taxable, you may believe that you don’t need to include it on your tax return. HMRC requires details of all such payments, however, including severance pay, to check whether the tax treatment is correct and also determine if you need to move into a higher tax bracket because of the payment.
Failing to provide the required information, or making an error when reporting these payments, could lead to an underpayment of tax overall. HMRC operates a strict regime in the UK for declaring and paying tax, and you may be charged a penalty if you inadvertently under-report or make a mistake of any kind.
It’s not widely known that limited company directors can claim statutory redundancy on the insolvent liquidation of their company if they meet certain eligibility requirements. If your company is entering liquidation due to unmanageable debt, you may be entitled to a redundancy package in the same way as your staff.
Briefly, you need to have worked continuously for the company for two years under a contract of employment, receiving a regular salary via PAYE throughout this time. The average claim for director redundancy is currently £9,000, and can help to support your personal finances at a difficult time.
Some directors use redundancy pay to repay creditors, or for the professional fees involved in a voluntary liquidation – a process that can protect them from allegations of wrongful trading.
For more information on director redundancy and how to declare redundancy or severance payments if you’ve already made a claim, please contact Redundancy Claims UK to arrange a free, same-day consultation. We’re director redundancy experts and can provide the professional advice you need at this challenging time.
Does accepting a new job offer before the date of redundancy prevent a director making a claim for redundancy to the RPS
If you are looking to close your limited company, you may have attempted to strike it off by submitting a DS01 form to Companies House. This process is also sometimes referred to as dissolving or company dissolution.
A Creditors’ Voluntary Liquidation (CVL) is an official procedure whereby a company’s assets are liquidated in order to pay creditors. It’s typically initiated by directors when their company becomes insolvent and there is no hope of business recovery.
Redundancy claims are a very professional company, Caroline who is dealing with our case is friendly, compassionate and very clear in explaining everything during this difficult time. The service we have received has been amazing, Thank you.Tina Hill Director of a professional services firm