What if an Employer Can’t Afford Redundancy Payments?

The conversation most directors dread, in practice, is not the one with the bank or HMRC. It is the one with a fourteen-year employee who has asked, politely, when their redundancy payment will clear.

When your company cannot afford statutory redundancy, the machinery that takes over is the Redundancy Payments Service, a government-backed safety net that pays statutory entitlements out of the National Insurance Fund when an employer has reached formal insolvency.

The catch, as ever, is in the qualifying conditions: RPS payments generally require a formal insolvency event (liquidation, administration) to unlock, and informal wind-downs do not trigger access to most of them. This gating detail is the one we see most directors miss.

What follows sets out what your employees are entitled to, what the RPS actually covers (with the current statutory caps), when formal insolvency is required to unlock access, and your risk picture as a director if the situation is allowed to drift. In our practice, this conversation almost always comes late, after notice has already been given, which narrows the options meaningfully.

What Happens When an Employer Cannot Afford Redundancy Payments

An employer’s inability to meet redundancy obligations is not a minor HR problem. It is, in law, one of the clearest external indicators of cash-flow insolvency and produces specific consequences that escalate quickly.

The immediate risk picture:

• Employment tribunal claims for unpaid statutory redundancy, unpaid notice pay, and unpaid holiday pay. Tribunals can make awards up to the statutory caps and enforce them like any other judgment.
• Protective awards where collective consultation rules have been breached. Where an employer proposes 20 or more redundancies within a 90-day period, section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 requires collective consultation. Failure to consult can trigger a protective award of up to 90 days’ pay per employee.
• Director personal liability where the situation tips into wrongful trading. Continuing to run payroll and accumulate further redundancy liability past the point where insolvent liquidation was unavoidable is directly exposed to a section 214 claim.

The first two problems compound quickly. A tribunal claim delayed is a tribunal claim with costs added. The third is the one that actually reaches your personal position as a director. Each is materially reduced, in our experience, by prompt engagement with one of our licensed insolvency practitioners.

What Employees Can Claim from the Redundancy Payments Service

The Redundancy Payments Service (RPS) is part of the Insolvency Service and pays certain statutory employment debts out of the National Insurance Fund when the employer cannot. The specific entitlements and current caps (as at April 2026):

• Statutory redundancy pay, available to employees with at least two years’ continuous service. Calculated at:
  • ½ week’s pay for each full year under age 22
  • 1 week’s pay for each full year aged 22–40
  • 1½ weeks’ pay for each full year aged 41+
  Service capped at 20 years. Weekly pay capped at £751 for redundancies on or after 6 April 2026 (previously £719 for 2025/26).
• Statutory notice pay, one week’s pay per year of service up to a maximum of 12 weeks. Employees claim from the National Insurance Fund where the employer cannot pay.
• Unpaid wages, up to 8 weeks’ pay for unpaid wages, commission, overtime, or bonuses, subject to the statutory weekly cap.
• Holiday pay, pay for untaken statutory holiday accrued in the 12 months before insolvency, capped at 6 weeks.
• Protective awards, where a tribunal has awarded them for failure to consult, the RPS pays up to 8 weeks of the award, subject to the statutory cap. The balance above 8 weeks remains an unsecured claim against the insolvent employer.

Enhanced contractual redundancy terms, anything above statutory minimum that the employer agreed in a contract or collective agreement, are not paid by RPS. They remain unsecured claims against the employer and, in insolvency, usually rank alongside other unsecured creditors with limited prospect of recovery.

Processing time at RPS is typically around 6 weeks from full application to payment, assuming the employer (or the IP) has provided the required reference information. Protective award payments take longer.

Why Formal Insolvency Is Required to Unlock Redundancy Payments

This is the gating detail that catches directors out most often. RPS access to most of the payments (wages, holiday pay, notice pay, protective awards) requires a formal insolvency event. An informal cessation of trading does not unlock them for your employees.

The qualifying insolvency events are:

• Creditors’ Voluntary Liquidation (CVL)
• Compulsory liquidation (court-ordered)
• Administration
• Company Voluntary Arrangement (CVA) (in limited circumstances)

For statutory redundancy pay specifically, employees can apply to the Secretary of State under the Employment Rights Act 1996 where the employer has failed or refused to pay and reasonable recovery steps have been taken, even without formal insolvency. But for wages, holiday pay, and notice pay, the formal event is the practical pre-requisite.

This is why you cannot help your employees access RPS by simply closing the doors and walking away. Your employees need the case reference number from an appointed licensed IP to make most RPS claims. Without the formal process, their claims sit in limbo.

How the Redundancy Payments Service Actually Works in Practice

Once the formal insolvency appointment is made, the IP provides each employee with an RPS case reference number. Employees use the online government service for claiming redundancy and related payments to submit their claims.

The sequence the employee works through:

1. Submit redundancy pay claim online (covers statutory redundancy, unpaid wages, holiday pay).
2. Once the redundancy claim is processed, submit a separate notice pay claim via the dedicated service.
3. Where a tribunal has made a protective award, the RPS considers payment automatically; no separate application is usually needed.

All payments are subject to the statutory weekly cap of £751 (from 6 April 2026). Any amount above statutory limits, or any enhanced contractual redundancy, remains a claim against the insolvent employer’s estate and is paid (if at all) through the distribution waterfall the liquidator or administrator runs.

Immediate Steps If You Cannot Afford Redundancy Payments

The sequence that consistently produces the best outcome for both employees and the director:

1. Get a licensed IP in the room before notifying employees. The IP can model the insolvency route, advise on timing, and ensure the formal process is triggered at the right point for RPS access.
2. Collate payroll and employment records. Payslips, contracts, holiday records, continuous service dates. The IP will need these to produce the RPS references for employees.
3. Handle collective consultation correctly. Where 20 or more redundancies are in prospect within 90 days, 30 to 45 days of consultation is required depending on the numbers. Getting this wrong triggers protective awards.
4. Communicate openly with employees. Transparency about the situation, the formal process timeline, and the RPS route is the single most useful thing the director can do. Employees whose questions are answered directly do not usually escalate to tribunal unnecessarily.
5. Document every decision contemporaneously. Board minutes, IP advice, consultation records. This is the material that defends against a later wrongful-trading or misconduct claim.

Time Limits That Matter for Redundancy Claims

• Statutory redundancy pay, applications must generally be made within 6 months of the employment ending (with discretion to extend to 12 months in limited circumstances).
• Notice pay, claims follow the redundancy pay claim, submitted after the statutory notice period has expired.
• Tribunal claims for unfair dismissal, protective awards, unlawful deduction, usually 3 months less one day from the effective date of termination.
• Wrongful dismissal (contract), 6 years under general contract limitation.

Missing these windows usually extinguishes your employee’s claim. The 3-months-less-one-day tribunal deadline in particular is unforgiving, which is why we recommend you calendar it the moment the employment ends.

Director Liability When Redundancy Obligations Go Unpaid

Directors are not automatically personally liable where the company cannot pay redundancy. Personal liability arises only where specific misconduct is established. And those routes are the same handful that recur across every insolvency topic.

• Wrongful trading, continuing to run the business past the point where insolvent liquidation was unavoidable, including continuing to employ staff whose redundancy the company could not fund.
• Fraudulent trading, carrying on business with intent to defraud creditors, including employees.
• Breaches of statutory duty, including preferring connected-party creditors over employee claims.

To reduce your exposure: seek our licensed IP advice early, maintain accurate financial and employment records, prioritise creditor interests (which includes your employees as preferential creditors) once insolvency is likely, and avoid continuing to trade where the numbers no longer support it.

Our view is that the single most valuable piece of paper you can produce if challenged later is the first IP advice note on file. We treat it as the clock-stop for wrongful-trading exposure.

If your company cannot meet redundancy obligations, our licensed insolvency practitioners and business rescue specialists can explain the options, outline the RPS route, and guide you through the next steps. Call us free on 0800 074 6757 for confidential advice.

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Methodology & Disclosure

This guide is written by the Company Debt editorial team, reviewed by licensed insolvency practitioners, and reflects UK employment and insolvency law as at the last-reviewed date. Statutory caps are accurate for the 2026/27 tax year (£751 weekly pay cap from 6 April 2026; was £719 for 2025/26). References are drawn from the Employment Rights Act 1996, Trade Union and Labour Relations (Consolidation) Act 1992, and Insolvency Act 1986.

Company Debt is a licensed UK insolvency practice. Where we recommend a CVL, CVA, or Administration, we can act as the licensed Insolvency Practitioner under separate engagement. The 0800 number is a free confidential consultation.