Redundancy is a complex topic and one many businesses find daunting. And one of the most difficult aspects of the process is finalising redundancy pay.
However, if you’re considering making redundancies due to the coronavirus pandemic, remember the UK government’s Job Retention Scheme allows you to furlough staff.
This covers part of their monthly wage, subsidised by the UK government, which may enable you to retain staff rather than make them redundant. The scheme is set to run until October 2020.
We have a coronavirus business support centre where you can request an advice call from us.
And while redundancy is a last resort for your business, if you have to go ahead then you can refer to this guide for advice on the payment process.
What is redundancy pay?
Its purpose is to compensate employees who lose their jobs through redundancy.
Staff members receive a lump sum at the end of their employment that depends on their age and length of service, in addition to any amounts they may have entitlement to in their contract.
Why you may need to make redundancies
If your business closes, or you need to reduce the number of employees working in your business, it’s likely you'll need to make the affected employees redundant.
This may be something you’ll need to consider due to the coronavirus crisis. Depending on a number of factors, your staff may have entitlement to redundancy pay in the UK.
But do small businesses have to pay redundancy? UK law dictates they do—there’s no limitation on who needs to provide it.
Of course, you must have a genuine need to dismiss an employee. So, make your business case before going ahead. Paying them is in the final stage of the process.
How does redundancy pay work?
When you make employees redundant, they’ll receive their redundancy payment at the end of their employment.
This will be in addition to their redundancy notice pay, which is the amount payable to them when working their notice as normal.
How much is statutory redundancy pay?
It varies. You need to first understand there are two types of redundancy pay:
But statutory redundancy pay (SGP) is a lump-sum that's calculated on the employee’s pay, age, and length of service.
It’s a legal requirement. The rules are set by the government, meaning you need to provide this to your staff at the end of their contract of employment.
Statutory redundancy payments are only payable to qualifying employees. So, those who have completed two years’ continuous service with your business.
The amount is based on the employee’s average weekly pay, subject to a weekly maximum redundancy pay amount.
How to work out redundancy pay
Calculate the payment on the basis of an employee's:
- Length of service.
- Weekly pay.
Their weekly pay is subject to a maximum, which as of 6th April 2020 is set at £538 in England, Scotland and Wales. Length of service for an employee caps at a maximum of 20 years’ service.
To work out redundancy pay, the formula is:
- One and a half weeks' pay for each complete year of service after reaching the age of 41.
- One week´s pay for each complete year of service between the ages of 22 and 40 inclusive.
- Half a week´s pay for each complete year of service under the age of 22.
The calculation can be tricky to get right. It’s advisable to seek further assistance if necessary.
For example, redundancy pay for part-time workers UK will be different to full-time workers as their weekly rate of pay is likely to be lower.
The government has a redundancy pay calculator available if you require it.
Redundancy pay rates in Northern Ireland
Calculating pay is slightly different for Northern Ireland. Here the weekly maximum is currently £560.
Otherwise, the calculation process is the same, ie dependent upon age and length of service (up to the maximum of 20 years).
Redundancy pay and age discrimination
This is important when calculating statutory redundancy pay.
While it’s not necessarily discrimination to provide less pay to staff on the basis of their age, it may be discriminatory if you choose staff for redundancy due to their age.
Ill health and redundancy pay
If staff face dismissal from work after a period of sick leave (and are receiving reduced sickness payments), calculate their statutory redundancy pay based on what they would usually earn.
Is redundancy pay taxable?
Your employees will receive payments of under £30,000 tax-free. This applies to any payment of redundancy, both statutory and contractual.
The combined total of redundancy pay must not exceed £30,000 in order to be tax-exempt.
Redundancy pay if the company goes into liquidation due to coronavirus
So, who pays redundancy when an employer cannot? That’s the UK government, who’ll assess the situation if the company is insolvent.
Employees need a ‘CN’ (case reference) number in order to claim redundancy pay from HMRC. Employees must apply for redundancy pay within six months of dismissal.
Can employers claim back statutory redundancy pay?
Generally, you can’t do this. However, the government does offer assistance in other ways.
For example, if your business is going to become insolvent as a result of meeting redundancy payments, the Insolvency Service’s Redundancy Payments Service (RPS) may be able to help.
However, you’d need to repay any debt as soon as possible.
Are directors entitled to redundancy pay?
If you’re a director of a company for at least two years and that company becomes insolvent and is goes into liquidation, you may have entitlement to redundancy pay.
However, you’ll need to demonstrate you have acted as an employee of this company.
Need our help?
If you’re considering redundancies, or need assistance with finalising payments, we’re here to help. Get in touch for quick answers to your questions: 0800 028 2420.