Redundancy: Compensation and tax

Firstly, your employer is obliged to pay you the full term of notice as stated in your employment contract. Whether or not they expect you to work out your notice period is up to them.

Basic statutory requirements
An employee is entitled to a redundancy lump-sum payment provided they meet the following criteria:

• 104 weeks' continuous service
• Age between 20 and 64
• Employment is terminated because of redundancy

The lump-sum redundancy payment is calculated as follows:

• For each year of employment between the ages of 16 and 41 years, a half week's pay
• For each year of employment over the age of 41, one week's pay
• In addition, one week's pay irrespective of service. (A week's pay is subject to a ceiling of £260 a week.)

This is the statutory amount a company is required to pay by law, but many companies will compensate you with more than this.

What if the company has gone bankrupt?
This is a completely different situation which unfortunately is not good news for the employee. Bankrupt companies cannot afford to pay redundancy packages and, having declared themselves insolvent, are not obligated to pay redundancies or even salaries.

You will have to wait with all the other creditors in the hope of receiving what is owed to you. Employees do, however, fall into a preferential treatment category which puts them near the top of the list of creditors, but below banks and the Inland Revenue.

Tax and Social Security benefits
The good news is that you can receive up to £30,000 as a lump-sum redundancy payment tax free.

If your package is more than £30,000, it is worthwhile requesting that the company pays the extra money directly into your pension scheme to avoid tax on this additional amount.

If you are given notice of redundancy and are required to work out your notice or placed on garden leave, the money you receive will be construed as a salary and will be subject to income tax.

If, however, you are paid out a lump sum and are thereafter not contractually bound by the employer, you will be entitled to receive this payment tax free as it is not technically a salary. If you receive compensation for relocation, the first £8,000 is also tax free.

For further information on tax see the Inland Revenue website at www.inlandrevenue.gov.uk.

Social Security benefits
The Department for Social Security pays a Jobseeker's Allowance for people who are available and actively looking for work.

As you will have been in work and were paying National Insurance, you could be eligible for the contributions-based Jobseeker's Allowance, which is paid at a fixed rate based on your age, for up to 182 days.

Alternatively, depending on how much you have in savings, you could be eligible to receive the income-based Jobseeker's Allowance. For more details you need to contact your Jobcentre or see the DSS website at www.dss.gov.uk.

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