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Understanding eligibility for director redundancy pay
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What is director redundancy pay?
When a company enters an insolvent liquidation process such as a Creditors’ Voluntary Liquidation (CVL), the directors of that company are often entitled to claim redundancy pay and other statutory entitlements. This is because as well as being directors of the company, it is usually the case that they are also classed as employees of the business as well. The amount of redundancy pay a director may be entitled to will depend on a range of factors including age at the time of redundancy, length of service, and the salary taken during this time.
Company directors are eligible for redundancy pay, also known as directors redundancy, in the event of company liquidation or closure.
The common assumption is that there is nowhere to turn when your company is struggling financially with critical cash flow problems and liquidation looks to be the only option. You may not even have the funds to liquidate. However, in this precise situation, you may qualify for a number of statutory entitlements which could provide a much needed windfall in troubled times. Settlements are paid to the director and are based on eligibility criteria. Any redundancy payout can be utilised in any way the director chooses. At an undoubtedly difficult time this payment could help ease the financial strain following the closure of the company, or it could even be used to start a new venture should the director wish.
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If you are a director of a limited company – which has been trading for over two years – and you are closing the company due to financial struggles (i.e. HMRC debts, creditor pressure, cash flow worries, potential insolvency), it is likely that you can claim for director redundancy for which the average UK claim is £9,000. In addition, it's likely you can claim for other statutory entitlements such as notice pay, holiday pay and unpaid wages - yet many company directors are not aware that these entitlements are available to them.
"Many directors are entitled to redundancy payments when their company enters liquidation."
If you do meet the criteria, claims can be made from the National Insurance Fund via the Redundancy Payments Service (RPS), and are tax-free. You can ask for a form from the liquidator, or request one online.
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As we mentioned earlier, you must be regarded as an employee of the company as well as a director in order to be eligible. This should be your initial consideration, and the criteria for claiming statutory redundancy pay as a director include:
- Working under a contract of employment for at least two years - whether written, oral or implied, rather than only having a controlling interest
- Working a minimum of 16 hours per week
- Being owed money by the company – this could be arrears of PAYE for example, or the money you initially invested
Yes - in the same way as other limited company directors - IR35 contractors (such as one-person limited companies) can claim director redundancy if they meet the criteria above. Remember, claiming redundancy pay as an IR35 contractor includes working under a contract of employment for at least two years continuously, and receiving a regular salary under PAYE.
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Having established that you are, in fact, an employee of the company, the amount you’re entitled to depends on your length of service, age, and rate of pay. The rate of gross weekly wages at the time of redundancy (capped at £571/week) and your length of time in service (capped at 20 years) are used as the basis for calculating how much redundancy pay you’ll receive.
To be eligible, you must have completed a minimum of two years’ service. Employees owed money by an insolvent company become preferential creditors, and you may also be able to claim backdated salary and holiday pay.
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First and foremost, directors need to meet certain criteria in order to apply for director redundancy payments. The quickest and easiest way to ascertain whether you qualify for director redundancy is to be assessed by an independent firm who specialise in helping company directors with their statutory entitlements and can advise you of your position.
You may also be able to claim unpaid wages of up to eight weeks, and a maximum of six weeks’ holiday pay. The money is taken from the National Insurance Fund, which is where National Insurance Contributions are held and used to pay for statutory schemes such as redundancy and the state pension.
Further Reading on Understanding eligibility for director redundancy pay
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