Are redundancy payments tax deductible

Yes, in most cases. Redundancy pay, including enhanced payments, is deductible under normal principles if it is paid wholly and exclusively for the trade, and statutory redundancy pay is deductible under a specific rule even where it would otherwise be disallowed. When the trade, or part of it, permanently ceases, extra payments above the statutory amount that would otherwise fail the trade purpose test are still deductible, up to three times the statutory payment.

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When is a redundancy payment deductible under normal rules?

HMRC’s Business Income Manual at BIM47200 says redundancy payments are deductible under general principles if they are paid wholly and exclusively for the purposes of the trade and do not result in the business acquiring assets or rights of a capital nature. For a business that keeps trading and reduces its headcount, statutory pay, contractual enhanced pay and reasonable ex gratia sums agreed to secure an orderly reorganisation will normally pass that test like any other staff cost.

The case law identifies situations where the trade purpose test can fail:

Payments above the employee’s existing contractual or statutory entitlement made for the purpose of closing down or selling the trade (CIR v Anglo Brewing Co Ltd [1925] 12 TC 803).
Payments made as part of a bargain involving the transfer of shares (James Snook and Co Ltd v Blasdale [1952] 33 TC 244).
Payments influenced by family or private interests (Samuel Dracup and Sons Ltd v Dakin [1957] 37 TC 377).

Payments the employer was already obliged to make, under the contract or statute, are treated differently. Following the Privy Council in CIR v Cosmotron Manufacturing Co Ltd [1997] 70 TC 292, BIM42955 tells HMRC officers not to argue that such payments are disallowed under the Anglo Brewing principle. The same page notes that a payment made to secure employees’ cooperation while the business is still trading is allowable (O’Keefe v Southport Printers Ltd [1984] 58 TC 88). The general rules on staff costs are summarised on the page about allowable business expenses.

How does the specific relief for statutory redundancy pay work?

Sections 76 and 77 of the Corporation Tax Act 2009 (CTA 2009) allow a company a deduction for a statutory redundancy payment under Part 11 of the Employment Rights Act 1996, or an approved contractual payment, where no deduction would otherwise be allowable. BIM47205 confirms this overrides the capital prohibition, because specific rules allowing a deduction generally override those that prohibit one. The equivalent rules for sole traders and partnerships are in sections 76 to 80 of the Income Tax (Trading and Other Income) Act 2005.

An approved contractual payment is deductible under this rule only up to what the statutory payment would have been, and BIM47205 notes that approved schemes are rare. Where the employee worked partly in the trade and partly in another capacity, section 78 requires a just and reasonable apportionment. BIM47205 also accepts that statutory payments made in practice to working directors on a cessation can be deducted in the usual way. How the statutory amount is calculated is covered on the page about statutory redundancy pay.

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What extra relief is there when the trade ceases?

Section 79 CTA 2009 applies where the employer permanently ceases to carry on a trade, or part of a trade, and pays an employee more than the statutory redundancy payment. If the additional payment would have been deductible had the trade not ceased, a deduction is allowed, but limited to three times the statutory payment. BIM47210 gives the example: a statutory payment of £1,000 allows additional payments of up to £3,000 to be deducted.

This is aimed at the Anglo Brewing problem: enhanced payments made because the business is closing. Two limits apply:

The cessation must be of the trade or a part of it. A general cost cutting exercise in a continuing business does not qualify, although there the payments will usually be deductible under general principles anyway.
BIM47210 says payments made as part of a bargain for the sale of shares, as in George Peters and Co Ltd v Smith [1963] 41 TC 264, do not qualify.

Under section 80, where a trade is carried on in partnership, a change in the partners counts as a permanent cessation for this purpose unless a company carrying on the trade in partnership immediately before the change continues to carry it on afterwards.

In which period is the deduction given?

For the specific reliefs, sections 77(7) and 79(5) give the deduction for the accounting period in which the payment is made. If it is made after the trade has permanently ceased, sections 77(4) and 79(4) treat it as made on the last day of trading. That keeps the deduction inside the final trading period instead of producing a post cessation expense with more limited relief.

Where the deduction is due under general principles, BIM47215 says a provision for future payments can be deducted only if it appears in GAAP accounts and the payments are made within nine months of the end of the period of account. Under FRS 102 Section 21, a provision requires an obligating event at the reporting date: a detailed formal plan whose main features have been announced to those affected, or which has started to be implemented. A plan approved by the board but not communicated to staff does not support a provision. The accounting side is covered on the page about termination benefits.

How does this work when a company closes?

Illustration only. Retail Ltd permanently ceases its trade on 31 March 2027 and pays an employee in May 2027. The employee’s statutory redundancy payment is £6,000. The directors also make an ex gratia payment of £25,000 because the business is closing, with no contractual obligation to do so.

Statutory £6,000: deductible under section 77, treated as paid on 31 March 2027, the last day of trading.
Ex gratia £25,000: likely to fail the trade purpose test under Anglo Brewing because it was paid to close the business.
Section 79 then allows up to three times £6,000, so £18,000 of the ex gratia sum is deductible, also treated as paid on 31 March 2027. The remaining £7,000 is disallowed.

Had the £25,000 been due under an enhanced redundancy policy in the employee’s contract, the Cosmotron principle would apply and the whole amount would be deductible under general principles.

What does the employer need to watch on the employee side?

The employer’s deduction is separate from the employee’s tax. Termination payments are taxable only above the £30,000 threshold in section 403 of the Income Tax (Earnings and Pensions) Act 2003, and for 2026 to 2027 GOV.UK confirms employers pay Class 1A National Insurance at 15% on termination awards over £30,000, reported and paid through payroll. Splitting a package between notice pay, holiday pay and compensation is explained on the page about tax on termination payments.

What mistakes come up most often?

Deducting a redundancy provision when the plan had not been announced by the year end.
Claiming section 79 relief for a restructuring where no trade or part of a trade has ceased.
Deducting enhanced payments to shareholder directors that are really part of the price for selling their shares.
Missing that payments made after closure are treated as made on the last day of trading, so they belong in the final computation.
Applying the three times cap to contractual enhanced pay that is deductible in full under general principles.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.