We're often asked how to post redundancy payments on the firm's books.

Any redundancy payment that an employer makes to an employee is part of pay and hence is an expense accounted for on the employer's profit and loss account, taken in the month in which the redundancy occurs.

As a cost, a redundancy payment reduces the profits reported from the profit and loss account to the balance sheet. The payment therefore reduces the net worth of the company as reported on the foot of the balance sheet for that year.

Since the redundancy payment is part of pay, it must be treated as such and processed through payroll, making appropriate deductions for tax. There are specific situations when redundancy may be tax free.