Redundancy

Employees who are made redundant are entitled to at least a minimum level of statutory redundancy payment and in addition, many employers provide further enhanced redundancy payments. The tax relief available for redundancy payments depends principally on whether or not the reason for the payment is genuinely for redundancy. The definition of “redundancy” can be taken from Section 139 of the Employment Rights Act 1996.

The amount of a statutory redundancy payment is a “week’s pay” for a number of weeks that is based on the employee’s age and length of service. A “week’s pay” is determined using special rules in the Employment Rights Act 1996, but for statutory redundancy purposes in Great Britain, the maximum amount per week is ￡544 (￡571 from 6 April 2022). There is also a maximum number of weeks that may be payable according to the age and length of service of the employee, the maximum number of weeks payable is 30 weeks.

Statutory redundancy pay is exempt from tax as employment income, but it also falls within the rules of Section 401 of the Income Tax (Earnings Pensions) Act 2003 (ITEPA) insofar as the amount counts towards the ￡30,000 threshold. In practice it is not taxed, because it is always treated as the first payment to be offset by the ￡30,000.

Where an employee’s contract includes a “redundancy termination scheme” that provides for enhanced redundancy payments, such a payment falls within Section 401 of ITEPA, even though it is contractual. It benefits from the tax-free ￡30,000 threshold but remember that any termination payment exceeding ￡30,000 will also attract a Class 1A NI contribution which is reportable through the employer payroll function in real-time.

If an employer intends to make more than 20 people redundant, this triggers collective consultation requirements, including minimum consultation periods during which redundancy dismissals cannot take effect. The consultation period for employers who anticipate making 100 or more people redundant is 45 days and for those anticipating making between 20 and 99 redundancies it is 30.

Regardless of the numbers, you should also follow a fair process where you meet with employees that are at risk of redundancy and listen to any suggestions they have for avoiding redundancies.

During the consultation period and at any time before the dismissal takes effect, employers are obliged to consider employees at risk for any suitable alternative vacancies that become available in the business or in any associated companies. Any employee on maternity leave or shared parental leave has the right to be offered any suitable alternative employment first.

Otherwise, if you have more than one other potentially redundant employee interested in an alternative role, you can undertake a competitive interview process to decide who to offer the role to.

One other option open to the business could be asking for non-compulsory redundancies.

This is where employers ask their employees if they would like to volunteer for redundancy. This may be an attractive option for some people and helps employers protect employees who are more dependent on their job. If, after this process, a business still needs to let some people go, they would then move onto compulsory redundancy.