How To Process Redundancy Pay Through Payroll

In an ideal world, every business owner will always need their employees. After all, it costs money to recruit, train and retain employees.

But extenuating circumstances such as company restructures, mergers and acquisitions, relocations, lack of sales and more often lead to redundancies. 

What is redundancy pay?

Redundancy pay refers to the financial compensation you offer your employees when you’re reducing your workforce and removing positions from your business.

What are the legalities surrounding redundancy pay?

Employees are entitled to statutory redundancy pay if they’ve been working for you for two years or more. They are permitted to:

●       Half a week’s wages for every full year for employees under 22

●       A week’s full pay for every year the employee is over 22 but under the age of 41

●       A week and a half’s pay for each full year they were 41 or older

The length of service is limited to 20 years.

If an employee is made redundant on or after 6 April 2022, their weekly pay is capped at £571 and the maximum statutory redundancy pay they’re entitled to is £17,130. 

How is redundancy pay calculated?

Statutory redundancy pay is calculated by someone’s age and how long they’ve worked for your business.

You then need to work out their weekly pay and look at an average figure for the 12 week period prior to them receiving their redundancy notice.

This 12-week period does not include sick pay, holiday or furlough.

You then need to add any of the following that applies:

●       Half a week’s wages for every full year for employees under 22

●       A week’s full pay for every year the employee is over 22 but under the age of 41

●       A week and a half’s pay for each full year they were 41 or older

Redundancy pay and tax

Tax is only paid on redundancy packages over £30,000. Employees do not pay any National Insurance on their redundancy pay.

Your employee’s redundancy payment may be subject to pension or attachment of earnings order deductions.  You can find this out from your pension provider or through HMRC.

How to process redundancy pay through PayEscape’s payroll software:

Our software  has several pre-set pay components to choose from, which means you don’t need to worry about ensuring the tax and National Insurance (NI) is correct, as this is already pre-set.

1. If you want to add a new component, simply click "Copy From Provider" which can be found on the Payroll Setup Additions screen.

2. There are two pre-set redundancy pay components to choose from - "Redundancy under £30k" and "Redundancy over £30k" - these will be pre-set with the correct tax and NI settings already in place.

3. This should then be added to the Payroll Batch so that it appears when you are submitting the payroll.

4. If the redundancy payment is being paid in the employee's final pay period - then you should ensure a leave date is entered at employee level before opening the payroll entry.

5. You should then submit the payroll as usual using the new pay codes to enter any redundancy payments due.

Speak to one of our advisors today and find out how to revolutionise your HR, time and attendance and payroll processes.