With the extent of the COVID-19 pandemic now reaching it’s one year anniversary, it’s become ever-more challenging to manage the ebb and flow of people within an organisation. Employers are thinking ahead to the end of the furlough scheme (CJRS) and how their business will operate in a post-COVID environment. This may unfortunately require a reduction in the workforce.

Difficult decisions for 2021

The recent Budget confirmation that the CJRS scheme will be extended to 30 September 2021 provides reassurance for many employers and their staff. But for some sectors, like hospitality and retail, the extension may still not be enough to prevent job losses.

 In an ideal world, all furloughed employees will return to work when the CJRS scheme ends but trading conditions may not have recovered enough for businesses to take on the cost of full salaries, so redundancies are inevitable.

Whilst many employers made a commitment to pay redundancy and notice pay at the employee’s pre-furlough salary, some used a loophole to reduce these payments to furlough levels, so in July 2020 the government passed a speedy piece of legislation to ensure that furloughed employees receive statutory redundancy and notice pay based on their pre-furlough pay.

Is a redundancy payment taxable?

Redundancy is treated differently for tax purposes – up to £30,000 is tax free but other elements such as holiday pay, bonuses and payment in lieu of notice are taxed as per regular earnings. Other non-cash benefits (company car, computer, etc.) that are included in a redundancy package are given a cash value and added to the redundancy pay which may take the package over the £30,000 threshold.

Payment in lieu of notice (PILON)

If an employee is not required to work during their notice period, they may receive compensation for an early termination of contract in the form of a PILON. Income tax and National Insurance are due on these payments. PILON cannot be reclaimed by employers under the CJRS scheme.

Redundancy following insolvency

Unfortunately, some employee roles may be made redundant after being furloughed because the employer is insolvent. In these cases, employees may be eligible for payments from the Insolvency Service but only if the employee hasn’t been dismissed and re-employed. Employees are still entitled to redundancy pay, paid notice and other owed money even though they were furloughed. The employer’s insolvency practitioner provides a case number for individuals to begin a claim.

Can an employee be made redundant whilst on furlough?

Although the CJRS scheme was designed as an alternative to redundancy, it isn’t advisable to use furlough in order to keep people in unviable jobs. However, some may argue that it is unfair to make an employee redundant while the CJRS scheme is in operation. Some employers have no choice but to consider redundancy, after all, there are costs associated with furloughing employees – National Insurance, pension contributions and holiday pay are all still owed.

As with all tax procedure in these uncertain times, it is always best to seek professional help when considering the future of a business. For solid, reliable advice, contact the experts at CRM on 01865 379272 or visit www.crmoxford.co.uk

Sage Accountant Partner Logoiris kashflowFreeagent