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Can I claim director redundancy if I pay myself in dividends?

Posted on: Tuesday 8th December, 2020

Can I claim director redundancy if I pay myself in dividends?

It’s often seen as a major benefit of setting up a limited company when you can pay yourself in dividends, but if the company experiences financial decline, taking only dividends as your remuneration limits your options and can become a problem.

It’s possible for some directors to claim statutory redundancy pay if their company enters insolvency and has to be liquidated, and you may be wondering “Can I claim director redundancy if I’ve paid myself in dividends?”

Are you eligible for director redundancy if you only receive dividends?

It’s not commonly known that directors are even eligible to make a claim, but redundancy pay can be crucial in funding a formal insolvency process, or helping directors survive financially on a personal level.

One of the key factors for claiming statutory redundancy pay as a director is receiving a regular salary through PAYE in the same way as other members of staff. But what if you haven’t taken your pay in this way?

Unfortunately, you won’t be eligible to claim director redundancy pay and other statutory entitlements because of your status within the company. You’ll be viewed purely as a director and not as an employee, which is required for eligibility.

 
Redundancy claims are a very professional company, Caroline who is dealing with our case is friendly, compassionate and very clear in explaining everything during this difficult time. The service we have received has been amazing, Thank you.
 
 
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Tina Hill

Being paid a salary as a director/employee

There’s nothing wrong with taking dividends from your company but if it’s done in isolation and you’re not on the payroll, it means you can’t claim director redundancy pay. For tax-efficiency, it’s common for directors to take a low salary through PAYE, and then top this up with dividends throughout the year.

When you can prove that you’ve been paid regularly through the company’s payroll scheme, you may be able to make a claim for redundancy if your company enters insolvent liquidation.

So what other requirements must be met to claim redundancy as a director?

Eligibility for director redundancy

In order to be eligible for director redundancy pay, you need to:

  • Work under a formal contract of employment for a minimum of two continuous years
  • Work for at least 16 hours per week
  • Fulfil a role that’s not just advisory
  • Be owed money by the company

If you’re entitled to director redundancy pay you may also receive other payments, such as outstanding holiday pay or arrears of wages. This can boost the overall redundancy package that you receive, and potentially help you pay for the formal liquidation process.

Entering Creditors’ Voluntary Liquidation, rather than being forced into liquidation via a winding up order, is important as it offers you more control over the process. You can choose your own insolvency practitioner, and there’s less likelihood of misconduct allegations being made against you.

But the start of the process is really how you’re paid. If you pay yourself only in dividends, you won’t be eligible for a potentially significant sum - the average director redundancy claim currently stands at £9,000.

For more help and information on claiming director redundancy, please contact our expert team. Redundancy Claims UK offers free same-day consultations and can provide expert guidance on eligibility.


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