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When an employer becomes insolvent, the Redundancy Payments Office (RPO) may make a payment to employees of the employer under the insolvency provisions of the Employment Rights Act. As the RPO is not an employer they do not operate a tax code on the payment. This means they just deduct basic rate tax and you may pay too much tax on your redundancy payment.

 

LITRG provides a brief explanation of the issue and a suggestion as to action to be taken.

 

If you are made redundant and your employer cannot or will not make a redundancy payment, you may be able to claim a protective award from The Insolvency Service (which operates the Redundancy Payments Office). You are normally eligible for a statutory redundancy payment if you have worked for your employer for more than two years. There is more information on GOV.UK about the limits and statutory amounts.

 

The tax rules on redundancy packages  are complex, but redundancy payments are generally tax free up to the limit of £30,000. This means that if you receive a redundancy payment from The Insolvency Service, it is likely to be exempt from tax. The package you receive, however, may also include elements that are taxable and liable to National Insurance contributions (NICs), such as unpaid salary or holiday pay.

 

Unfortunately, when HMRC receive information about your redundancy payment from The Insolvency Service or RPO they are unable to identify whether or not any part of this is non-taxable. As a result, HMRC systems treat the full redundancy payment as taxable and include all of it in your P800 Tax Calculation.  Note that a solvent employer would normally only report the taxable element of a redundancy payment to HMRC. So even if you have paid too much tax, this will not show on the P800 Tax Calculation.

 

It appears that HMRC are aware of this issue and that they have guidance in place on how to correct calculations that include payments from The Insolvency Service with a non-taxable element. However, HMRC only act on these instructions if you contact them.

 

Check your P800 Tax Calculation and, if you think it is wrong, contact HMRC. 

 

It is your responsibility to ensure that you have paid the correct amount of tax and to check notices you receive from HMRC, such as P800 Tax Calculations. If you have received a redundancy payment from The Insolvency Service, LITRG would encourage you to review your tax position to ensure that you have not paid too much tax. If you think you have overpaid tax, you can make a claim for repayment. HMRC have published a factsheet for employees.

 

Full LITRG article (includes further useful links)

HMRC factsheet for employees about redundancy

GOV.UK