Director Redundancy Pay: Eligibility, Calculations, and How to Claim
- What is Director’s Redundancy Pay?
- Can I Claim Redundancy if my Company Goes into Liquidation?
- Are You Eligible for Director Redundancy Pay?
- At What Point Can I Claim for Director Redundancy?
- How are Director Redundancy Payments Calculated?
- How to make an Application for Redundancy Pay
- Is Director’s Redundancy Pay Taxable?
- Can IR35 Contractors Claim Director Redundancy?
- What if Your Claim is Rejected?
- FAQs on Director Redundancy Pay
What is Director’s Redundancy Pay?
Director’s redundancy pay is financial compensation available to directors of insolvent companies entering liquidation. It’s designed to provide a safety net for directors who lose their jobs due to insolvency.
To be eligible, you must be legally recognised as an employee of the company, not just an office holder.
The amount you can claim is calculated based on three factors:
- Your age
- Length of service (capped at 20 years)
- Weekly salary (subject to a statutory maximum)
As of April 2023, the maximum statutory redundancy payment is £16,320. This applies to both voluntary and compulsory liquidation scenarios.
It’s important to note that recent changes in policy have made the eligibility criteria more stringent, particularly regarding how directors structure their remuneration. I’ll explore these details in the following sections.
Can I Claim Redundancy if my Company Goes into Liquidation?
Yes, if your company goes into liquidation, you can claim redundancy. In the UK, directors have the right to claim redundancy pay, along with other entitlements such as holiday pay, unpaid wages, and notice pay from the government’s National Insurance Fund.
>>Read our in-depth article on What Happens to Employees When a Company Goes into Liquidation
Are You Eligible for Director Redundancy Pay?
In order to receive director’s redundancy payments, directors must be legally recognised as employees, which typically means having an employment contract, working at least 16 hours weekly, being integral to daily operations, and having been employed for at least two years, with redundancy due to company insolvency.
Directors must receive a regular salary at or above the National Minimum Wage (NMW); this is now a critical factor in claim assessments.
The Redundancy Payments Service will request these details as supporting evidence[1]Trusted Source – GOV.UK – Check if you can apply for redundancy payments as a company director.
Directors should be aware that common tax-efficient payment structures, like taking a minimal salary with larger dividend payments, may jeopardise their eligibility for redundancy claims.
Do Directors Need to Have an Employment Contract to Qualify for Redundancy Pay?
An employment contract is ideal for directors to qualify for redundancy, but it doesn’t always need to be written. This contract can be written, oral, or even implied by the nature of their working relationship with the company.
At What Point Can I Claim for Director Redundancy?
You may claim for director redundancy at the point of, or following, your company’s entry into formal insolvency proceedings, such as liquidation or administration.
It is prudent to file soon after the insolvency process begins, bearing in mind that there are strict time limits for making a claim. The redundancy payment claim should be made within six months of the relevant date of insolvency but no later than 12 months.
How are Director Redundancy Payments Calculated?
The amount of redundancy pay you may be entitled to claim largely depends on your age, how long you have been employed by the company, and your weekly pay up to a certain limit.
| Age | Length of Service | Redundancy Pay |
|---|---|---|
| Under 22 | Each full year | Half a week’s pay per year |
| 22 to 40 | Each full year | One week’s pay per year |
| 41 and older | Each full year | One and a half week’s pay per year |
Additional Information:
- The length of service is capped at 20 years.
- Weekly pay is subject to a maximum amount set by the government (currently £544 as of April 2023).
- The maximum statutory redundancy payment is £16,320.
In addition to redundancy pay, directors may also be eligible to claim:
- Accrued holiday pay (up to a maximum of six weeks)
- Unpaid wages (up to eight weeks)
- Pay instead of notice (up to 12 weeks)
Pay instead of notice is applicable in cases of redundancy and is calculated based on the director’s length of service. For each full year of employment, a director is entitled to one week’s pay instead of notice.
How to make an Application for Redundancy Pay
To apply for director redundancy, you should follow these steps:
- Discuss your situation with the insolvency practitioners handling your liquidation. They will advise you on the eligibility criteria and the application process.
- Complete the forms provided by the insolvency practitioners. These forms will ask for information about you, your employment, and your redundancy.
- Submit the forms to the Redundancy Payments Service (RPS). The RPS is a government agency that administers statutory redundancy pay for employees and directors.
- Provide the RPS with your case reference number, National Insurance number, and any other supporting documentation. This may include your contract of employment, pay slips, and bank statements.
- Wait for the RPS to process your claim and issue payment.
If you are eligible for director redundancy, you should receive your payment within 14 days of submitting your claim. If you have any questions or concerns about the application process, you should contact the insolvency practitioners or the RPS for assistance.
Is Director’s Redundancy Pay Taxable?
Yes, director’s redundancy pay is taxable. However, the first £30,000 of redundancy pay is tax-free for all employees, including directors. Any redundancy pay above £30,000 is taxable at the director’s normal income tax rate.
Directors who receive redundancy pay must also pay National Insurance contributions on any amount above the National Insurance lower earnings limit.
Can IR35 Contractors Claim Director Redundancy?
Yes, IR35 contractors can claim director redundancy in the same way as other directors if they meet the following eligibility criteria:
- They have worked under a contract of employment for at least two years continuously.
- They have received a regular salary under PAYE.
What if Your Claim is Rejected?
If the Insolvency Service rejects your claim for director’s redundancy pay, you can appeal the decision by making a claim to an employment tribunal. Before doing so, you must inform the Advisory, Conciliation and Arbitration Service (Acas) of your intention.
Acas will offer Early Conciliation, which is a free service designed to help resolve disputes before they reach a Tribunal.
Time is of the essence in these matters. You have three months, less one day, from the date of your rejection letter to start the Acas Early Conciliation process. If conciliation doesn’t resolve the issue, you’ll then have up to six months from the original rejection date to file your tribunal claim.
Preparing for a tribunal can be complex. You’ll need to gather all relevant documentation, including employment contracts, payslips, and evidence of your role in the company. It’s often wise to seek legal advice to strengthen your case.
FAQs on Director Redundancy Pay
Can a director claim redundancy if they are also a shareholder?
Yes, a director who is also a shareholder can claim redundancy, provided they meet the standard criteria of being an employee under the terms mentioned above and their redundancy is due to the insolvency of the business.
What is the deadline for directors to claim redundancy payments?
Directors must make their redundancy claim within six months of the relevant date, usually the date of dismissal due to redundancy. However, there is a final deadline of 12 months for late applications, which are only accepted in exceptional circumstances.
Are directors’ redundancy payments subject to a maximum limit?
Yes, directors’ redundancy payments are capped. The maximum amount is revised periodically and is subject to statutory limits regarding weekly pay, length of service, and age.
What documentation is required to support a director’s redundancy claim?
Directors must provide proof of their employment status, such as a contract of employment, payroll records, and evidence of work done for the company. Additionally, they need to supply details of the insolvency, often via an insolvency practitioner or documentation from the insolvency service.
Can directors receive redundancy payments if they resign before the company’s insolvency?
Generally, directors who resign before the company becomes insolvent are not eligible for redundancy payments. Eligibility typically requires that the director be made redundant as a direct result of the company’s insolvency.
How long does it take for a director to receive redundancy payments after making a claim?
The time frame for receiving redundancy payments can vary. Once a claim is submitted and all necessary documentation is provided, it typically takes between 3-6 weeks for the Redundancy Payments Service to process the claim and issue the payment, provided there are no complications or additional information required.
What happens if a director disagrees with the redundancy payment amount offered?
If a director believes the redundancy payment calculated by the Redundancy Payments Service is incorrect, they can appeal the decision. This usually involves providing additional evidence or clarifying the information related to their employment and earnings.
What is the difference between redundancy pay and notice pay for directors?
Redundancy pay is compensation for the loss of employment when a company becomes insolvent, while notice pay is the amount a director is entitled to receive as notice if their contract of employment is terminated. Directors may be eligible for both types of payments depending on their circumstances.
How does being a part-time director affect redundancy claims?
Part-time directors are eligible for redundancy payments as long as they meet the criteria of an employee, regardless of their part-time status. Their redundancy payment will be calculated based on their actual earnings and part-time hours, subject to the same statutory caps that apply to full-time employees.
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.
- Trusted Source – GOV.UK – Check if you can apply for redundancy payments as a company director
