Losing your job can be a real blow and bring many worries, especially if money is tight. If you find yourself in this situation, it’s important to get the support you need and check if you’re entitled to any benefits. Depending on your personal circumstances and work history, you could receive a redundancy payment, which could help soften the impact of losing your job. Here’s what you could do with your redundancy package.
Are you entitled to redundancy pay?
A redundancy payment is essentially compensation for your loss of work. Typically, if you’ve worked continuously for your employer for two years or more and they make you redundant, you should be entitled to receive redundancy pay. Check your employment contract or staff handbook to find out about your ‘contractual redundancy pay’. If you can’t find anything, then check with your work and it could mean that you should get the statutory redundancy pay, which is the legal minimum.
How much redundancy pay could you get?
How much you get will depend on many factors, such as your age throughout your working years, your current salary, and how long you’ve been working for your employer – length of service is capped at 20 years, meaning any extra years won’t be counted1.
With the statutory redundancy pay, you should get half a week’s pay for each full year you worked under 22 years old. Then it’s one week’s pay for each full year when you were 22 or older, but under 41, and one and half week’s pay for each full year you were 41 or older. By ‘week’s pay’ we mean the average you earned per week over the 12 weeks preceding your redundancy notice. If you were ‘on furlough’ during that time because of Coronavirus, your redundancy pay will not be impacted and will remain based on your normal weekly pay1.
As things currently stand, the payout you get is capped at £538 per week (or £560 a week in Northern Ireland), and the maximum statutory redundancy pay you can get is £16,140 (or £16,800 in Northern Ireland)1. If you want to know how much statutory redundancy you can get, you can use HMRC’s calculator here: https://www.gov.uk/calculate-your-redundancy-pay.
Some companies will have their own policies, which could potentially be more generous. So, make sure you check your contract and see what it says. The good news is that the first £30,000 of your redundancy pay is tax-free and you won’t even have to pay National Insurance on it1. However, other types of payout, such as holiday pay and payment in lieu of notice - where you get paid during your notice whether you work or not – are taxed as pay. And remember that tax treatment depends on your personal circumstances and financial situation and may be subject to change in the future.
Ways you could use your redundancy pay
After receiving your redundancy pay, you may want to think about how you’re going to use it. Here’s a few things to consider if you want to make the most of it.
Check you’ve got the right amount
First thing first, before you spend it or save it, it could be wise to check you’ve got everything in your account. And remember tax! If your redundancy pay exceeds £30,000, you may owe extra tax, so before doing anything with your cash, make sure you contact HMRC to check you’re in the clear. Similarly, receiving a redundancy payment means your overall income will be impacted and depending on how much you get, you could be paying extra income tax, so try and keep an eye on this.
Think about your expenses
The main advantage of getting redundancy pay is that it can help keep your finances afloat. By losing your job, you’re losing a stream of income, but unfortunately, your expenses aren’t going anywhere – you’ll still need to pay your mortgage and your bills, and you still need to live. Your redundancy payment can help you pay for all this until you get a new job, or launch your own business, or get some training – the sky is the limit!
And although the money is for everyday use, chances are you won’t need it all at once. So, you could leave it in an easy access savings account and only take out what you need each month, that way you’re sure not to overspend it.
Consider putting some aside
If you don’t have to spend it, then don’t – unless you want to. This redundancy pay could help boost your emergency fund. Without a job, the future can seem very uncertain, but one way to remain in control is to plan for the ‘what if’ scenarios. What if your car breaks down? What if you need to replace your washing machine? With an emergency fund, you’ll surely be reassured to know that you’ve got enough funds to cover any unexpected expenses. And the more money you can put aside, the better.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.