If your company is struggling financially and you’re worried about your own future, it’s reassuring to know that as a director you may be able to claim redundancy pay should the company be forced into liquidation.
Although not always a straightforward process, directors who can prove their status as an employee of their company may be eligible to make a claim for redundancy from the National Insurance Fund (NIF).
The NIF holds national insurance contributions from employers and employees, and is the source of payments for government schemes including the state pension and redundancy pay.
Are you eligible?
You should be able to claim redundancy as long as you’ve also been trading for two years, and have held a continuous contract of employment during this time. If you’re eligible, you could potentially claim other payments too.
Various factors are taken into consideration when determining eligibility, including:
- Taking a salary under PAYE, as well as receiving dividend payments
- Having more than an advisory role within the company – carrying out a practical, management role
- Working more than 16 hours per week
- Being owed money by the company – whether that is your original investment, or arrears of salary/holiday pay, for example
How much can you claim in redundancy pay?
The maximum amount you can claim is currently capped at £14,370. How much you actually receive is based on a range of aspects including your length of service, age, and rate of pay. The government also places a cap of 20 years on the length of service and £479 on your weekly pay, but redundancy payments are tax-free.
The calculation is made by multiplying a proportion of your weekly gross pay by the number of years you’ve worked for the company, taking your age as the starting point:
- Between 18 and 21 years of age – half a week’s gross pay
- Between the ages of 22 and 40 – one week’s gross pay
- Over the age of 40 – one and a half week’s gross pay
Payments can provide a valuable lifeline if you’re worried about how to manage financially, and they’re usually paid within six weeks of submitting a claim.
How do you make a claim?
When your company becomes insolvent and is liquidated, a licensed insolvency practitioner will be appointed to oversee the process. Initially they’ll need to confirm that you are in fact an employee of the company, via a questionnaire from the Insolvency Service.
As we mentioned earlier, there is potential for complexity when directors claim redundancy. A common issue is not having a written employment contract in place, even though your activities and role within the company are clearly one of an employee.
Your status may simply be implied, or you might assume that because your role has been discussed, an oral contract of employment is sufficient. Being paid via PAYE suggests that you’re more than just an advisor, and have a similar relationship to the business as other employees.
The claims process
Once your eligibility has been established, the insolvency practitioner will be able to issue an RP1 claim form which should be submitted to the Redundancy Payments Service (RPS). You can also make a claim online if you wish, and there is help available if you need it.
You’ll receive confirmation of your claim via form RP5. This needs to be carefully checked for accuracy to make sure you receive your full entitlement. Payments are usually made within six weeks of a claim being submitted.