We dole out advice on redundancy

Published on Saturday 22 March 2008 13:12

Off you go: if redundancy strikes, make the most of your payout – and avoid splashing out on a Ferrari or Chanel suit

THE scourge of unemployment raised its head last week with 2,000 job losses announced at Northern Rock, fears of staff cuts among the nearly 2,000 Bear Stearns staff in London, and rumours of a potential for 10,000 redundancies in the City of London. And as the economy and housing market slows the numbers of casualties is likely to rise.

Scotland on Sunday answers the questions everyone afraid for their jobs will be asking.

How much will I get?

The least you must be paid after working for your employer for two years is the minimum statutory redundancy payment amounting to half a week's wage up to a weekly limit of 330 for each year worked under the age 22, one week for those aged between 23 and 40 and 1.5 weeks for those aged 41 or more, up to a maximum of 20 weeks. So that gives the under 40s 6,600 after 20 years or the over 41s 9,900.

Many employees enjoy more generous protection, but terms will depend on individual contracts, or company policy. If you are unhappy with what is being offered, try to negotiate with your employer. Your professional body or trade union may be able to help. It can make sense to consult an employment lawyer.

Is this money taxed?

The first 30,000 of a redundancy payout is free from tax and National Insurance, provided it is genuinely compensation for redundancy. Above this amount, payments are added to your earnings for that year and taxed at your highest marginal rate. To qualify for 30,000 tax exemption you must be made redundant. Gardening leave, for example, is not redundancy, and neither is three months' salary in lieu of notice.

PricewaterhouseCoopers' tax partner Valerie Smart said: "The (HM Customs &] Revenue can also be very difficult about contractual payments. So, for example, if you have a contract which says you must be paid so much if the employer asks you to leave early, they view this as a contractual payment not redundancy."

Even more worrying, the taxman is increasingly scrutinising redundancy payments made to people in their 50s. Smart adds: "If you are made redundant in your 50s and never work again, is that redundancy or pre-retirement? If you don't work again, they are beginning to try to argue that it is a retirement lump sum and should be taxed."

The exception to this rule is MPs who enjoy a special privilege, extended in the recent Budget to members of the Greater London Council, and London mayor Ken Livingstone.

If MPs lose an election or decide to leave they can apply for a resettlement grant which can pay half of their 61,000 salary if they have been in the house for less than 10 years, rising to 100% over 15 years at certain age groups. MPs enjoy the first 30,000 of their resettlement grant tax-free, even though they would not be entitled to under the rules which apply to the rest of us.

Will I get a tax rebate?

There's a good chance you are due a tax rebate if you leave work half-way through the year, as you will not have used all your personal allowance. Make sure you get a P45 when you leave as this will make sorting out your tax affairs easier.

If you doubt you will work further in the tax year write to your tax office and ask for a refund. In the case of financial hardship, ask them to expedite the matter. Where you have a job to go to, any rebate will be paid through your pay packet when you join a new employer.

How else can I cut tax on my redundancy?

You can avoid tax above 30,000 by paying the surplus up to your annual salary into a pension, thereby hanging on to up to another 40%. The maximum which can be pensioned this year is 225,000 or 1.6m over a lifetime.

However, you may do better to ask your employer to swap part of your redundancy lump sum for a discretionary payment into your pension. This allows him to save 12.8% National Insurance, which he may be happy to share with you via an enhanced contribution.

This can become particularly attractive if you are over 50, as you can currently take 25% of whatever you put into your pension out immediately as tax-free cash. This rises to age 55 after April 2010.

However, Roger Beeden of actuarial consultants, Mercer, warns: "Putting money into a pension can make sense, but it will tie the bulk of the lump sum up for some years. Buying an annuity, or taking pension early, in your 50s, will be expensive and could have a detrimental impact on your ultimate pensions. You can take the lump sum without buying an annuity, but what do you live on meanwhile?

"It is also important to remember this is not a tax get-out-of-jail-free card. It is tax deferral. The money will still be taxed when it comes out as pension."

What to do with the cash?

Do not rush into new investments or silly purchases, or let a redundancy payout burn a hole in your pocket. The temptation to splash out on a Ferrari or Chanel suit can be overpowering, particularly when your self-esteem has just taken a nasty knock. Don't.

If you don't get a job quickly you will need this cash to pay the mortgage and eat. If you want to invest it to produce a long-term income take advice. A financial adviser can help you draw up a low-risk strategy.

What else should I think about?

You will lose a whole range of benefits when you leave your company, some of which must be replaced immediately. According to Mercer additional benefits can be worth 10% of an entire employment package.

Most pension schemes provide life insurance and disability protection, and it is vital to buy new life cover immediately, particularly if you have a young family. However, Beeden said: "It may not be possible to replace other insurances, such as disability, because they insure an income. If there is no income coming in, you can't insure it." Your employer may allow you to buy your company car, so you could try negotiating over that. Otherwise you will have to replace other insurances such as dental or medical, or rely on the NHS.

What happens to my company shares?

Millions of employees subscribe to company Sharesave schemes, which allow you to save for up to seven years and then buy shares at a substantial discount.

If made redundant, even just a few weeks before the scheme matures, employees forfeit the shares and get a refund of their savings plus a small bonus. Check best buy tables to find a deposit account paying good interest for this money.

If you have shares or options in the company as part of your package of employment, you might forfeit them automatically or be forced to encash them, thereby triggering a capital gains tax bill. If possible, time your disposal with care to maximise your CGT allowance which rises next month from 9,200 to 9,600. If you have held the stock for a long time, it may make sense to dispose of it before the start of the next tax year, when indexation and taper relief is abolished.