Further Redundancy Blow As £30k Tax Exemption Hopes Dashed

Feb. 19, 2009 - PRLog -- A leading tax expert is warning employers making redundancies not to assume staff will automatically receive £30k tax free benefit when they leave their job, even though special tax rules allow MP's to pocket the entire amount.

Following on from reports that disgraced MP Derek Conway will receive £30,000 of his £31,645 payout tax free when he stands down at the next election, Mark Lee, Chairman of the Tax Advice Network is reminding employers that £30,000 of redundancy pay for staff may not be exempt from tax, even if it is paid in connection with their departure from a job.


Many employees receive additional payments over and above their tax-free statutory redundancy pay. Beyond this Lee says "Yes, there is a tax rule that means that up to £30,000 may be exempt from tax. It's set out in Section 401 ITEPA 2003 (previously s148 ICTA 1988). But this rule only becomes relevant if certain criteria are met. No one can afford to assume that their situation will automatically pass the tests", says Lee. The position is different for MPs as their lump sums are subject to special rules in s291 ITEPA 2003 and thus always satisfy the related test.

According to Lee, the basic rule for everyone else is that any extra sums paid by an employer to an employee are subject to tax if paid in accordance with a contractual obligation, if paid for work done, if paid for work to be done or if such payments are part of the employer's standard practice when someone is asked to leave their job. That's the basic rule. Only statutory redundancy payments are definitely tax free.

Lee's main concern is that many will end up with hefty tax bills in 2010 by wrongly assuming they qualify for the tax allowance even though they do not satisfy the basic rule.

"Taxpayers are required to report their 'tax free' lump sum on their tax returns. The taxman invariably checks back to determine whether the employer properly reported relevant details. And if HMRC is not satisfied that all is correct the taxman will then seek payment of tax from the employee. For people receiving redundancy payments in early 2009, the relevant tax returns are those for the current tax year. These will not be filed until later in the year, or as late as January 2010. It could be months later before the tax demands start being issued - long after the lump sum has been spent", says Lee.

Lee is advising employers who intend to pay departing staff more than the statutory redundancy payments to seek specialist tax advice. He says there is much confusion surrounding this tax exemption and adds,  "Yet again, there seems to be one rule for MP's and another for everyone else."