Someone once said, “the hardest thing in the world to understand is a tax”, which is very true. It is very important to know the different types of taxes, how they affect you and how to make sure you don’t end up on the wrong side of the law.
Redundancy tax is something dreaded by people and for good reason. We will look closely at this subject and also provide information on changes that have recently been made so you can be updated, what to do when it happens to you, and coping after you receive it
So What Exactly Is Tax On Redundancy Payment?
Tax on redundancy payment refers to the amount of money paid out by employers during an employee termination. This includes both compulsory and voluntary redundancies. It is basically money that your employee gives you when your work is terminated by factors in and out of your control.
It is a taxable benefit received from the employer by an employee when redundancy arises from situations like:
- Company downsizing
- Business transfer
- New technology has made your job unnecessary
- Your employee needs to cut costs by reducing employees
- Your business was bought by another company
But how do you know if the redundancy payment made to an employee is taxable? The answer: it really depends on what kind of redundancy payment you make and also the employees.
So what are the kinds of these taxes are:
This is a tax that is paid on an employee’s earnings when they are made redundant. It is basically paid by your employee when your employment gets terminated. The money is taxed as income and employees pay tax on it at their marginal rate of income tax.
This kind of payment is tax-free depending on your years of service in that company.
Taxed at your usual marginal tax rate if the payment is:
- equal to or less than your redundancy entitlement; and
- part of a genuine redundancy process where you received notice before you left the company
- If it’s more than your entitlement, then tax may be paid at a special rate (with some exceptions).
- Genuine redundancy payment does not include such things as severance pay or any other non-statutory payments.
Non-genuine redundancy means that your employment was terminated, but not because it is redundant.
It can be due to your actions or behavior. An example includes misconduct or company restructuring. This kind of payment is considered as a termination payment and it is taxable in the same way as wages are taxed under PAYE.
Termination payments are also subject to the employer’s superannuation contributions.
Some of the criteria can be:
- Dismissal due to disciplinary issues or inefficiency issues
- The employee leaves voluntarily
- When someone has reached pension age and retirement age
- Leaving on termination of the contract
Generally, it is taxed lower than your normal income tax rate and you will need to complete a tax return if the amount is more than $10,000.
What Are The Changes Made On Redundant Tax?
As of the 29th of October 2019 changes were made that affect your redundancy pay entitlement.
Practically, it means that the tax-free inheritance allowance will be removed which means you will have to pay normal income tax on redundancy payments in excess of $10,000.
What To Do When Faced With Receiving This Type Of Payment
Receiving a redundant tax payment means that you have basically lost your job and that cannot be easy. While processing the next steps, be mindful and consider any of the following:
Remember Its Not Your Fault
In situations where there is nothing you could have done to stop the termination of your job, especially in a genuine redundancy situation, you should not feel guilty and keep in mind that it is the company’s decision and not yours.
The first thing to do when the redundancy payment becomes payable is rather important. Speak to your employer about how much money you are getting and when you will receive it. Then plan your financial life from then until you get a new job.
Check Your Contract
It is very important to properly read anything you sign, the contract is one of them. It is crucial that when faced with redundancy, you familiarise yourself with all the clauses in your contract.
If you feel that something is amiss, go over it again or have someone look at it for you. You may be entitled to receive more money than what was stated in your contract.
Talk To Your Family And Friends
The loss of a job affects more people than the person who lost their jobs, such as people depending on that one salary, that can be a spouse and children and extended family members and friends.
It is important that you communicate with them so they can help support you because losing a job is not only about financial loss but also affects you mentally and socially.
What To Do In Between Jobs
Hard as it may be to lose a job that has provided financial security, there are some proactive things you can do while looking for a new job.
This goes as well for other situations other than redundancy like the covid pandemic. Consider the following:
One way you can upskill yourself is by making sure you are always on the lookout for any new skills that can make you more marketable.
Be proactive in your search for a job. This is something to consider if you are not finding a job just after losing one. This is where you have the advantage of being available before other people who lost their jobs.
This is a great way to gain experience. This can be an option for either upskilling or getting new skills, you receive a salary and gain valuable experiences without the stress of looking for a job.
It is important to keep an open mind when looking for your next role. Changing industries is never easy but you could make it easier by looking for roles or areas that require your current skills.
Start Your Own Business
This can be a nerve-wracking thought. To actually build a business from the ground up or partner with someone to start a business, especially if you have been an employee for a while and might not be used to all the responsibilities that come with running a business.
But it is definitely something you should consider, especially if you want more flexibility in your life or for retirement purposes. Also, it is important to remember that most businesses are not profitable in the first year so it is advisable to prepare yourself financially before jumping into this.
The Bottom Line
Be prepared for your redundancy.
One of the hardest things to be hit with is redundancy. Whether you are faced with one or the one handing it, it is important to know your legal rights and responsibilities that can make this process easier.
Still have questions, get in touch with a local tax accountant for more professional advice.
Redundancy can be a difficult time for anyone, but with the right knowledge and advice, it can be a little easier to get through. Remember to speak to your employer about your payment, familiarise yourself with your contract, speak to your family and friends and consider upskilling yourself or interning. Most importantly, keep an open mind about your next steps.