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Understanding Redundancy Payments and the Role of the Insolvency Service

When a business closes, redundancy payments become a critical aspect for employees and directors. This guide provides a detailed overview of redundancy payments, including when the Insolvency Service gets involved, how payments are determined, and other essential information for company directors.

Redundancy Payments and the Insolvency Service

What Are Redundancy Payments?

Redundancy payments are compensations given to employees, including business directors, when their jobs cease to exist due to company closure.

These payments can be either statutory or contractual, with statutory redundancy pay being fixed by law.

The amount for contractual redundancy pay, however, varies per company and is detailed in the employment contract.

Statutory vs. Contractual Redundancy Pay

  • Statutory Redundancy Pay: Fixed by law, ensuring a minimum amount of compensation.
  • Contractual Redundancy Pay: Specified in the employment contract, potentially offering more than the statutory amount.

When the Insolvency Service Steps In

Redundancy payments are compensations given to employees, including business directors, when their jobs cease to exist due to company closure.

These payments can be either statutory or contractual, with statutory redundancy pay being fixed by law.

The amount for contractual redundancy pay, however, varies per company and is detailed in the employment contract.

Restrictions and Limitations

  • Payment Caps: For redundancies occurring on or after 6 April 2022, weekly pay is capped at £571. For redundancies before this date, the cap is lower.
  • Creditor Registration: If owed more than the maximum payable by the Insolvency Service, you can register as a creditor for the outstanding amount.
  • National Insurance Deductions: Payments for holiday pay, arrears, notice worked but not paid, loss of notice compensation, and protective awards have NI deducted at 13.25% post-6 April 2022 (12% before this date).

Calculating Weekly Pay

The Insolvency Service determines weekly pay based on the employment contract, considering factors such as:

  • Regular Pay: Calculated based on weekly earnings or equivalent if paid differently.
  • Variable Hours: For redundancy, arrears, and notice pay, an average over 12 weeks is used. For holiday pay, the average is over 52 weeks.
  • Overtime, Commission, and Bonuses: May be included if specified in the contract.

Payment Process

To receive redundancy payments, the Insolvency Service requires your bank details upon application. Payments cannot be processed without this information.

Pension Contributions

The Insolvency Service might cover some pension shortfalls if the employer failed to make all contributions due to insolvency.

Tax Implications

Redundancy payments are exempt from tax, ensuring you receive the full amount you are entitled to.

Seeking Further Assistance

For more detailed information on director redundancy payments, refer to our Director Redundancy Guide.

If you need help closing your company and applying for redundancy payments, contact us at 0800 088 2142 or email info@businesshelpline.uk. Our experts, with over 60 years of combined experience, have successfully assisted thousands of clients.

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