Eligibility for Directors’ Redundancy Pay
Many company directors are not aware that it’s possible to claim redundancy during a company’s insolvency. This article will explain the criteria directors must meet to be eligible and the necessary steps to make a claim.
The process can be straightforward with the right guidance.
- What is Director’s Redundancy Pay?
- Can Directors Get Redundancy Pay?
- Are You Eligible for Redundancy as a Director?
- Can IR35 contractors claim director redundancy?
- When Can I Claim for Director Redundancy?
- How Much Redundancy May I be Entitled to Claim?
- Is Director’s Redundancy Pay Taxable?
- How to Apply?
- FAQs on Director Redundancy Payments in the UK
What is Director’s Redundancy Pay?
Director’s redundancy pay is a specific form of financial compensation awarded to directors of companies that have become insolvent. It is intended to help directors mitigate the financial impact of losing their jobs as a result of the company closing down.
Only directors who meet certain eligibility criteria can claim director’s redundancy pay. Specifically, the director must be classified as an employee of the company.
The amount of director’s redundancy pay that an individual director may receive is determined by their age, length of service, and weekly salary. It is subject to a maximum limit of £16,320.
Director’s redundancy pay is available irrespective of whether the company undergoes voluntary or involuntary liquidation.
Can Directors Get Redundancy Pay?
Yes, directors can get redundancy pay, but it depends on their specific circumstances. To be eligible for redundancy pay, a director must be an employee of the company and must meet certain criteria, such as having been with the company for at least two years.
Are You Eligible for Redundancy as a Director?
Directors are eligible for redundancy if their company becomes insolvent, provided they meet the following criteria:
- The director must be legally classified as an employee, which involves:
- Having a formal contract of employment (whether written, oral or implied)
- Working at least 16 hours per week.
- Performing tasks that are key to the business’s daily operations, not merely advisory.
- The director must have been employed by the company for a minimum of two years.
- The redundancy must be due to the company’s insolvency.
Tasks that demonstrate involvement in the company’s core operations include managing daily activities, making strategic decisions, handling staff management, overseeing the company’s finances, and leading marketing and sales efforts.
Directors who are not classified as employees are not eligible for director’s redundancy pay.
Do Directors Need to Have an Employment Contract to Qualify for Redundancy Pay?
For directors to qualify for statutory redundancy pay, an employment contract is essential, but it doesn’t always need to be a written one. This contract can be written, oral, or even implied by the nature of their working relationship with the company. The key is that there should be clear evidence of an employment relationship, which has existed for at least two years. Directors are also expected to have worked a minimum of 16 hours per week to qualify.
In instances where a written contract is absent, a liquidator will evaluate if there is a credible claim during the liquidation process. It should be noted that directors who solely receive dividends and no regular wage may face challenges in demonstrating their employee status.
For directors lacking a written employment agreement, it is advisable to:
- Maintain accurate records of work hours and any company payments.
- Obtain a written statement acknowledging your role as an employee of the company.
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.
When 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 a claim for redundancy 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 Much Redundancy May I be Entitled to Claim?
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.
Here are the general rules as per the UK Government guidelines:
- You get half a week’s pay for each full year you were under 22.
- You get one week’s pay for each full year you were 22 or older, but under 41.
- You get one and a half week’s pay for each full year you were 41 or older.
Length of service is capped at 20 years and weekly pay is subject to a maximum amount which the government sets – this amount can change so it’s important to check the current figure. The maximum statutory amount you can get is currently capped at £544 a week (as of April 2023), and 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.
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.
How to Apply?
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.
FAQs on Director Redundancy Payments in the UK
What qualifies a director for redundancy payments in the UK?
A director qualifies for redundancy payments if they are legally considered an employee of an insolvent company, have a formal employment contract, have worked for the company for at least two years, and their redundancy is a direct result of the company’s insolvency.
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.