HMRC internal manual

Employment Income Manual

EIM13842 - Termination payments and benefits: redundancy: redundancy payments and “compensatory notice pay” made by Redundancy Payments Offices (RPOs) of the Department for Business, Innovation & Skills (BIS)

Redundancy payments are made to employees by the Redundancy Payments Offices (part of the Redundancy Payments Directorate of the Insolvency Service within the Department for Business, Innovation & Skills (formerly the Department for Business Enterprise & Regulatory Reform, previously the Department of Trade and Industry) under the insolvency provisions in Part XII Employment Rights Act 1996. This happens where the employer is unable to meet the statutory requirements to make these payments.

From 15 September 1997, the Redundancy Payments Office has calculated and accounted for any tax due on these payments (see PAYE Collection Manual at PA1.410 for details).

Note: As well as redundancy payments, RPOs make payments of “compensatory notice pay” where the employer is insolvent and the employee has not received the minimum notice period due under the Employment Rights Act 1996. These payments are in substance damages for breach of contract and so are calculated by applying the Gourley principle (see EIM13070 for details). Consequently, the payment is reduced to take into account basic rate tax that the employee would have paid had he or she stayed on and worked for the period of notice. That reduction is a reduction in the amount of the damages payable. It is not a payment of tax and is not accounted for by the RPO as such. It must therefore not be repaid to the employee as tax paid even though documents may describe it as “tax at basic rate”. If the employee later shows that less tax would have been paid over the tax year (for example, if the employee has unused personal allowances) the RPO will make an adjustment to the payment. The actual sum finally received from the RPO is the figure to take into account for tax purposes.