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Is director redundancy pay taxable?

Posted on: Monday 7th December, 2020

Is director redundancy pay taxable?

As a limited company director you may be able to claim redundancy pay if you’ve worked under a contract of employment for the company for two continuous years or more. Redundancy pay for directors can provide a valuable financial lifeline after a company closes down, so it’s important to know how much you might be able to claim and under what conditions.

Statutory redundancy pay is intended to compensate an individual for the loss of their job, so it isn’t treated by HMRC as a source of income. When a limited company closes due to insolvency, eligible employees and directors can make a claim.

Is director redundancy pay taxed?

Redundancy payments up to £30,000 are not taxable, but any amounts above this limit do attract tax at the individual’s normal rate, as do other statutory entitlements that might be part of a redundancy package.

You’ll also have to make National Insurance Contributions (NICs) on redundancy pay over the £30,000 threshold. Other payments including arrears of wages, holiday pay, and notice pay, are all taxable and subject to National Insurance.

Overall, these deductions could considerably reduce the value of some redundancy packages, so it’s worthwhile seeking help from a redundancy or tax expert to check that your claim and payments are correct.

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

Are you eligible to claim director redundancy?

Eligibility for director redundancy is more complex than for members of staff. You need to prove that you’re an employee of the company and have worked under similar circumstances as other employees.

This means working under an employment contract, whether it’s a written, implied, or oral contract, and then being able to prove that you’ve fulfilled a role that wasn’t just advisory.

Here are the basic eligibility requirements to claim redundancy pay as a director:

  • Working for the company continuously for two years or more
  • The company must have traded continuously for a minimum of 12 months prior to liquidation
  • Working for at least 16 hours per week
  • Receiving a regular salary through PAYE, rather than dividends alone
  • Fulfilling a role that’s more than advisory
  • Being owed money by the company, such as arrears of wages or your initial investment

How much redundancy pay could you claim tax-free?

Redundancy pay is calculated using your age, length of service, and weekly wage, as follows:

Aged 18-21: half a week’s pay for each full year

Aged 22-40: one week’s pay for each full year

Aged 41 and over: one and a half week’s pay for each full year

There’s a cap on length of service of 20 years, and gross weekly pay is also capped by the government at £571 for redundancies on or after 1st April 2021.

A tax-free payment of up to £30,000 could be available to you if your company has been liquidated and you’re eligible to claim. Redundancy Claims UK has extensive experience of helping directors make successful claims - for more information and help to make a director redundancy claim, please contact one of our expert team.

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