Redundancy Payments

April 3rd, 2009

Given the recent rise in unemployment it is natural to worry about job security and redundancy.  It is important to be aware of how much you could potentially receive to see you through if you were made redundant and any actions you can take to alleviate the situation if this did indeed happen.

If you are made redundant and you qualify for a statutory redundancy payment any amount up to £30,000 will be made free of income tax and national insurance. In order to qualify for statutory redundancy, you must have been in continuous service with your employer for at least 2 years and the payment is based on your age and length of service (up to twenty years).  You will receive:

  • Half a week’s pay for each full year of service if aged below 22 during the year
  • One week’s pay for each full year of service if age 22 or above during the year, but less than 41
  • One and a half weeks’ pay for each full year of service if aged above 41 during the year

For redundancies taking place on or after 1st February 2009, the amount of statutory redundancy pay is the number of weeks you are entitled to – subject to a cap of 30 weeks – multiplied by the lower of either your actual average weekly wage or a maximum weekly wage of £350 (£330 for redundancies before 31st January 2009). The maximum statutory redundancy payment is therefore currently £10,500.

Whilst an employer may only make the statutory redundancy payment, you may be lucky enough to work for an employer who will agree to pay you more than this. In this case the value of any statutory redundancy pay and any additional compensation payment must be added together and as long as the combined amount does not exceed £30,000, this will be paid to you as a lump sum completely tax-free.

Any amount over £30,000 will be taxed as income however the flip side of this is that the excess over £30,000 is classed as pensionable pay.  If circumstances permit the excess, or a proportion of it, could be paid into your pension with tax relief received on the contribution.

Any redundancy payment made over the statutory amount is at the employer’s discretion and given the current economic climate it may be more likely that only the statutory redundancy payment will be paid.  It is therefore important that you make yourself aware of your employer’s position regarding redundancy payments and if you are likely to be entitled to an additional discretionary payment.

Depending on your circumstances, you may also be entitled to some state benefits including jobseekers allowance, council tax benefit, housing benefit and support for mortgage interest (SMI).  You should seek advice on the precise amount of benefits you may be entitled to from someone such as Jobcentre Plus.

Jobseekers Allowance is the main benefit for people who are out of work and is paid if you do not have a job and are actively looking for work, but you must meet the eligibility requirements to receive it. There are two elements to Jobseekers Allowance – a contribution-based allowance, based on your Class 1 National Insurance contribution record and an income-based allowance, based on the level of your income and savings.

If you are claiming Income Support, income-based Jobseeker’s Allowance or income-related Employment & Support Allowance and you are a homeowner, your benefit may include additional Support for Mortgage Interest (SMI).  For those eligible, SMI is intended to provide some assistance with the interest on your mortgage and is calculated using a standard interest rate.  For new claims from 5th January 2009 the waiting period is 13 weeks and support is limited to the interest on a maximum of £200,000 of the mortgage capital.

There are insurance products which could, potentially, offer protection against the financial effects of redundancy.  It is important that you take advice if this is an option that you are considering to ensure that you obtain something that is suitable for your circumstances.

If you are struggling to meet mortgage or other debt repayments you should speak to the lender about this at the earliest opportunity.  You should review your budget to ensure that you are living within your means and find out if you are eligible for state benefit or tax credits, and if so claim them.  It is important that you seek advice at the earliest opportunity.