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HMRC internal manual

National Insurance Manual

Class 1 NICs: earnings of employees and office holders: payments made on termination of employment: redundancy payments: general

Regulation 25 and paragraph 6 of Part X of Schedule 3 to the Social Security (Contributions) Regulations 2001

Redundancy payments are payments which are made when an employee’s contract terminates by reason of redundancy. This is different to the situation when the employee has been dismissed for other reasons. See NIM02590 regarding the definition of “redundancy”. See also NIM02600 for information regarding statutory and non-statutory redundancy payments.

Legislation

Regulation 25 and paragraph 6 of Part X of Schedule 3 to the Social Security (Contributions) Regulations 2001 provide that “For the avoidance of doubt, in calculating the earnings paid to or for the benefit of an earner in respect of an employed earner’s employment, any payment by way of a redundancy payment shall be disregarded.”

The use of the term “For the avoidance of doubt” means that in the doubtful, but not impossible, event of a redundancy payment actually constituting earnings, it is in any event to be excluded from the calculation of earnings for NICs purposes.

Evidence

In any termination of an employee’s contract of employment on the basis that it results from redundancy, it is necessary to establish that:

  • there has been a dismissal or termination of the employee’s contract
  • this is attributable to redundancy, and
  • the payment involved is a redundancy payment and is not made for some other reason.

Mairs v Haughey

Useful guidance on the nature of redundancy payments can be found in the decision of the House of Lords in the Mairs (Inspector of Taxes) v Haughey (1993) case. See EIM13750.

In that decision Lord Woolf refers to a redundancy payment as having a real element of compensating or relieving an employee for the consequences of their not being able to continue to earn a living in their former employment. He also observes that such payments, instead of being a payment from an employment, are payments made to compensate the employee for not being able to receive the emoluments from their employment.

An example of a payment which is not a redundancy payment could be one made by the employer to an employee on retirement which is not part of their pension package, and the position is filled by another person.

Redundancy payments in excess of £30,000

It is possible that there will be some instances where the redundancy payment exceeds £30,000 and the excess is treated as taxable in accordance with section 401 Income Tax (Earnings and Pensions) Act 2003. This is one instance where the tax and NICs treatment of a payment would differ.

Genuine payments of this size are quite rare, but for NICs purposes any genuine redundancy payment will be free from liability and this will apply to the whole sum and not just to the £30,000 which would not be taxable.