Laid-off workers face £7,500 redundancy ‘stealth tax’

Tens of thousands of workers made redundant are being forced to pay a “stealth tax” of up to £7,500 on their payouts because of a little-known HM Revenue & Customs rule.

Around 51,000 people paid income tax on their redundancy pay in 2017-18, the most recent tax year for which data is available, generating almost £380m for the Government. The average sum paid was £7,451.

The threshold for paying tax on redundancy pay has not been changed since it was set at £30,000 in 1988 by HMRC. Around 20pc of redundancy payouts are above the £30,000 threshold, according to the Treasury.

Had the threshold risen in line with inflation, stockbroker AJ Bell estimated it should be around £73,000, meaning the average worker made redundant would pay no tax.

Experts have warned tens of thousands of people could be made redundant in the next year if the country enters recession.

According to data from HMRC, the amount of income tax paid annually on redundancy payouts fluctuated by hundreds of millions between 2010 and 2020. 

In 2016-17, 69,000 people were made redundant, generating £670m in tax.

AJ Bell said frozen thresholds were a way of generating income “by stealth” and that 30 years was a “very long time” to leave it unaltered. Income above the threshold is subject to tax at income tax rates.

Laura Suter, head of personal finance at the stockbroker, said the frozen limit “feels like a particularly cruel tax hit for people at a difficult period in their life” and that most people would not be aware of the tax break “until they actually need it”.

Ms Suter added: “With a recession predicted by just about every economist in the UK, it is possible that next year will bring a wave of redundancies as companies struggle to make profits and look to cut their overheads. 

In 2015, a consultation was held to review the threshold, with some suggesting it should rise in line with inflation, while others suggested reducing it to the level of the average termination payment (then around £14,000), or the level of average salary (£27,000).

However, the vast majority of respondents did not want the existing threshold to be reduced from £30,000 and the limit was unchanged.

Ms Suter said those losing their jobs in the near future could fall foul of this tax trap. She said: “This will be tough news for many workers, as they may also be hit with a stealth tax on any redundancy payout.

“For a higher-rate taxpayer, it means they will pay up to £17,200 more in income tax on any redundancy payout than they would have done had the allowance risen with inflation.

“It’s an easy way for the Government to save money, as it’s not well-known. But it feels like a pertinent time for the rate to be revisited, to help people keep more of their payout at a time when they need it the most.”

The Treasury declined to comment. HMRC did not respond to a request for comment.


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