AJ Bell press comment – 22 September 2022
- £30,000 tax-free threshold on redundancy hasn’t changed in nearly 35 years
- Those losing their jobs should be able to receive over £70,000 tax free had it risen with inflation
- Tax paid on redundancy up to £17,200 higher than it would have been had the threshold been indexed to prices
- Recession and rising costs could put pressure on businesses to cut staff
- FOI shows HMRC estimates it takes in £ hundreds of millions each year and impacts tens of thousands of workers that lose their jobs
HMRC is netting hundreds of millions of pounds a year in income tax on redundancy payments, new data from investment platform AJ Bell reveals.
Redundancy payments, handed to people when they’re laid off by their employer, are tax free up to a threshold of £30,000. This tax break on redundancy pay is designed to soften the blow for people losing their jobs, giving them extra financial wiggle room while they look for a new role.
But the £30,000 tax-free limit has been frozen for well over three decades, since it was set at that level in 1988 – during the Margaret Thatcher political era. AJ Bell’s calculations show that, had it risen in line with inflation, it would now be worth well over £70,000.
A Freedom of Information request from the investment platform shows that HMRC holds scant data on the impact of the frozen tax threshold. The Revenue admits any tax due on redundancy will normally be automatically deducted by employers and submitted to the taxman but the figures aren’t analysed, meaning it only has an estimate.
That estimate indicates tax on redundancy impacts tens of thousands of people every year, and rakes in hundreds of millions for the exchequer:
Source: HMRC response to FOI submitted by AJ Bell. HMRC’s estimates are based on its analysis of data from the Family Resources Survey.
With the UK economy facing a recession and the cost of goods and materials rising, many businesses will likely need to cut staffing costs. Raising the threshold at which redundancy pay becomes taxable would give people losing their jobs extra money to help them stay afloat financially while seeking a new role.
Laura Suter, head of personal finance at AJ Bell, comments:
“With a recession predicted by about every economist in the UK, it’s likely that next year will bring a wave of redundancies across the UK as companies struggle to make profits and look to cut their overheads. This will be tough news for many workers, as they will also be hit with a stealth tax as they head out of their employer’s door.
“The fact that the tax-free limit for redundancy pay hasn’t increased in more than 30 years feels a like a particularly cruel tax hit for people at a difficult period in their life. If the allowance had increased with inflation it would now stand at £73,000 – more than double what it is today. It means those who’ve lost their job will be faced with a far higher tax bill than they might expect. For a higher-rate taxpayer it means they will pay up to £17,200 more in income tax on any redundancy payout when compared to if the allowance had risen with inflation.
“What’s particularly mean about this stealth tax is that most people won’t be aware of the tax break until they actually need it, meaning 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.”
