A Guide to Director Redundancy

A Guide to Director Redundancy

Closing down a business can be a complicated process, with directors often overlooking the fact that they too are eligible for redundancy pay-outs. Gary Addison talks us through the small print.

By Gary Addison

Losing your job is never easy, regardless of the reasons behind it. If your employment has been terminated as a result of redundancy, then subject to certain conditions, you may be given a safety net in the form of a redundancy pay-out. Although this does not take away the stresses which come with losing your job, it can help to ease the financial strain you may be under during these difficult times. 

While redundancy for employees is widely understood, with a plethora of information available to guide you through the process, what many people don’t realize is that directors of limited companies are also entitled to claim redundancy should their business enter liquidation. This guide explores how company directors can claim redundancy, how much money they may be entitled to, and where the redundancy payment will come from. 

Who can claim director redundancy?

Just like with employee redundancy, there is a criteria which must be met before a company director becomes eligible for a redundancy pay-out. Firstly the director must be classed as an employee of the company rather than just its director. This is usually confirmed through a contract of employment, although it may be possible to verify this position in alternative ways, so it's crucial to keep a copy of any relevant documentation which may help with this.

Secondly the director must have been receiving a regular salary from the company paid through PAYE, and must have worked a minimum of 16 hours per week. In line with employee redundancy, directors must have met the above criteria for a minimum of two consecutive years immediately prior to submitting a claim.

Do I have to close down my company?

In order to be entitled to director redundancy your limited company must be closed down through a formal insolvent liquidation process such as a Creditors’ Voluntary Liquidation (CVL). If your company is solvent – that is, it is capable of paying its bills as and when they fall due and its assets outweigh its liabilities – then you will not be eligible for redundancy even if you close the business down. Likewise, if you decide to dissolve (strike off) your company from the Companies House register rather than placing it into a formal liquidation process you also give up your right to claim. 

If you're thinking about closing your company, it is always best to seek professional advice to ensure you do this in the most appropriate and financially beneficial way possible, as there are a number of ways to go about doing this and it's easy to get lost in the noise. For example, although dissolving your business may appear more cost-effective than paying for a formal liquidation, by going down this route you may be turning your back on a redundancy payment which has the potential to eclipse the liquidation fees.

How much will I be entitled to claim?

The amount you may be in line for depends on a variety of factors including your length of service, salary earned, and your age at the time of redundancy. This is calculated using the same figures as employee redundancy, and are as follows:

It's worth noting that the maximum length of service is capped at 20 years with a £508 weekly pay amount. This equates to a potential maximum statutory redundancy payment of £15,240. It is also worth bearing in mind that redundancy payments up to £30,000 are tax-free and are not subject to National Insurance Contributions (NICs) either.

As well as redundancy, it is likely that you will also be entitled to claim for a number of additional statutory entitlements such as notice pay, holiday pay, and unpaid wages. These can add up to a surprisingly high amount, and even though these elements will be subject to tax at your usual rate, they can still increase your total payment amount significantly. 

Where does redundancy money come from?

When a company makes redundancies, it is liable to pay any associated redundancy payments using its own funds. However, in the event of the company being insolvent and consequently not in the financial position to do this, claims for staff and director redundancy payments alike are instead made to the Redundancy Payments Service (RPS). Successful claims submitted this way are paid directly from the National Insurance Fund (NIF).

Making a claim after liquidation

In order to maximize your chance of success, it is advised that claims for director redundancy are made during the liquidation of the company. It is possible to submit a claim up to a year after the liquidation has concluded; however, the earlier the redundancy claims process is started the easier it typically is. 

About the Author

Gary Addison is a business advisory specialist from RedundancyClaim.co.uk. Gary has more than 25 years’ experience advising company directors and sole traders on a range of business issues including marketing, finance and HR.