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Can the self-employed claim redundancy?

Posted on: Friday 23rd April, 2021

Can the self-employed claim redundancy?

Guidance on self-employed eligibility for statutory redundancy entitlements

Your entitlement for statutory redundancy pay is directly influenced by employment law that differentiates between working styles.  You are classed as ‘self-employed’ by HMRC for tax purposes if you operate your own business, you are responsible for its performance and you are not paid through PAYE. As a result, you are not bound by the same protection, rights, and benefits as an employee, including statutory redundancy pay.

In some cases, the hirer may decide to make a discretionary payment following the termination of a contract, classed as a compensation payment.

If you are therefore self-employed, i.e. a sole trader, you are not generally entitled to redundancy pay. However, if you are the director of a limited company, and therefore an employee, you may be entitled to claim statutory redundancy pay

Understanding self-employed status during the redundancy process

If you are a contractor, you may also be classed as self-employed, depending on the way that you operate, i.e. through an umbrella company/agency or a limited company. If you are a limited company contractor, it’s worth noting that you can be both director and employee, as you are technically employed by your limited company, however, you cannot be both for the same company, i.e. director and also self-employed.

As a result, if you are a director of your limited company – you could be eligible for statutory redundancy pay.

Claiming statutory redundancy pay as a company director

As a company director and employee of your company, you will typically pay yourself through a combination of wages and dividends, depending on the tax implications. If you are paid wages that will be taxed through the PAYE system, you may be entitled to statutory redundancy pay for company directors, subject to the following rules:

-       Your limited company enters insolvent liquidation or administration

-       You are paid a salary through PAYE

-       You are working under a contract of employment for a minimum of two years

-       You are working a minimum of 16 hours weekly

-       You are owed money by the company, i.e. salary, holiday pay, director’s initial investment

-       You are fulfilling an active role, i.e. a position that is more than non-executive

You can only claim director redundancy if your business enters an insolvency liquidation procedure, not solvent liquidation. If your company is experiencing financial distress and is no longer viable, seek a voluntary liquidation procedure, such as a Creditors’ Voluntary Liquidation (CVL) to help you close your business in a cost-efficient manner.

Entering company liquidation and claiming director redundancy

Taking the dissolution route over company liquidation will invalidate your entitlement for director redundancy, for which the average claim is £9,000. In addition to director redundancy, you could claim other statutory entitlements, such as holiday pay, notice pay and unpaid wages.

Company directors in this position are often debt-ridden and forced to fight off pressure from creditors. Seeking company liquidation under the guidance of a licensed insolvency practitioner can help put an end to creditor pressure.

Guidance on company liquidation and director redundancy

It is often a common misconception that director redundancy cannot be claimed, however, this is a statutory entitlement for employees, i.e. company directors.

When considering the closure of your company, you should seek professional advice from a licensed insolvency practitioner to determine the best route forward. Your duty to act in the best interests of creditors continues through to the closure of your company.

We can help direct you throughout the process and assess your claim for director redundancy before the liquidation of your limited company. We offer a free consultation and can provide a free director redundancy pay quote in relation to your claim for director redundancy.

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