Director's Redundancy Advice
When a company goes into a formal insolvency process, such as Creditors Voluntary Liquidation (CVL), its directors may be eligible to claim statutory redundancy payments and other statutory entitlements. This is because, in addition to their role as directors, they are typically considered employees of the company.
The amount of redundancy pay a director can claim will depend on various factors, such as their age, length of service and salary during their time at the company.
It is assumed that when a company is struggling financially, with severe cash flow issues, and liquidation seems to be the only solution, there is no way out. Additionally, you may not even have the necessary funds to cover the costs of liquidation. However, in this particular scenario, you may qualify for a range of statutory entitlements that could provide much-needed relief during difficult times.
These settlements are paid to directors who meet the eligibility criteria. Directors are free to use any redundancy payout in any way they choose. During this undoubtedly challenging period, this payment could alleviate the financial strain following the closure of the company, or alternatively, it could be used to start a new venture, should the director wish to do so.
For more information on Cash Flow and Forecasting, read our article Cash Flow Forecasting - A Guide
Can I Claim Redundancy?
If you're a director of a limited company that has been trading for more than two years and you're contemplating shutting down the company due to financial difficulties such as outstanding debts to HMRC, creditor pressure, cash flow issues or potential insolvency, you're likely eligible to claim director redundancy, which averages £9,000 in the UK. Furthermore, you may be entitled to other statutory payments like notice pay, holiday pay, and unpaid wages, though many company directors are unaware of these available benefits.
If you meet the eligibility criteria, you can make claims for these entitlements from the Redundancy Payments Service (RPS), part of the Insolvency Service which is funded by the National Insurance Fund. These claims are tax-free. You may obtain a form from the liquidator or request one online.
For more information on eligibility to claim redundancy pay please read our article, Director Redundancy Pay: Can I Claim?
The Criteria
As previously mentioned, in order to be eligible for director redundancy pay, you must be considered an employee of the company as well as a director.
The criteria to claim redundancy for company directors include:
- Having a formal contract of employment for a minimum of two years service, whether it is written, oral or implied contract rather than solely having a controlling interest.
- Working at least 16 hours per week, on the payroll, and being paid more than the minimum wage
- Being owed money by the company, which could include arrears of PAYE or the money you initially invested.
Additionally, you may be entitled to claim up to eight week's pay and up to six weeks of holiday pay.
How much Redundancy Am I Entitled to Claim?
Once it has been established that you are considered an employee of the company, the amount of redundancy pay you are entitled to is determined based on your length of service, age, and rate of pay. Your gross weekly wages at the time of redundancy (capped at £571/week) and the duration of your service (capped at 20 years) are used to calculate the amount of redundancy pay you will receive.
To qualify for redundancy pay, you must have served for at least two years. As employees who are owed money by an insolvent company become preferential creditors, you may also be eligible to make a claim for back dated salary and accrued holiday pay.
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How to Claim
Directors must satisfy specific criteria to apply for director redundancy payments. The most efficient and straightforward approach to determine your eligibility for director redundancy payments is to consult an independent firm that specialises in redundancy payments for directors.
Are IR35 contractors eligible to claim director redundancy?
Yes, IR35 contractors, such as one-person limited companies, can claim director redundancy in the same way as other limited company directors if they meet the criteria outlined above. It's important to note that claiming redundancy pay as an IR35 contractor requires meeting the same requirements as other directors, including working under a contract of employment continuously for a minimum of two years and receiving a regular salary through PAYE.
Do you need advice regarding your situation?
If you're a company director considering a voluntary liquidation, or if you would like to discuss your eligibility for statutory redundancy pay with one of our experts, please contact Company Doctor today on 0800 169 1536 for confidential and no-obligation advice.
References
The primary sources for this article are listed below.
https://www.gov.uk/redundancy-payments-helpline
Details of our standards for producing accurate, unbiased content can be found in our editorial policy here.
FAQs
Directors' redundancy pay refers to the statutory payment that a director of a limited company may be entitled to receive if the company goes into liquidation or becomes insolvent, and they meet certain criteria.
To qualify for directors' redundancy pay, you must be a director of a limited company that has become insolvent and you must have a contract of employment with the company. Additionally, you must have worked under that contract for a minimum period of time.
Not all directors are eligible for redundancy pay. To qualify, you must have a contract of employment with the company, which means you are an employee of the company as well as a director. If you are a director without an employment contract, you may not be eligible for redundancy pay.
Directors' redundancy pay is calculated in the same way as redundancy pay for other employees. The calculation takes into account factors such as your age, length of service, and weekly pay (subject to a statutory maximum limit). You can use online calculators or seek advice from the Insolvency Service or an employment specialist to determine your specific entitlement.
Yes, there is a statutory maximum limit on directors' redundancy pay. The maximum amount is reviewed annually and can change. It is advisable to check the latest limit set by the government or seek advice from relevant authorities.
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