Global events have had a significant impact on the economy and uncertainty not only affects how we think about our finances but can have a life-changing impact on our career, family and financial wellbeing. With a cost of living crisis in full flow we take a look at the impact redundancy has on our finances and highlight ways you could make the most out of a redundancy payment.
Back to NEWSRedundancy no longer carries the stigma it once did, though with mortgages or rent to pay very few of us want to be the next ones to experience it, especially as prices are rising rapidly. However, if you have been made redundant or fear that you could be made redundant in the future there are simple and practical steps you can take to minimise the impact on your financial well-being. In this article we are going to take a look at
1. Creating a redundancy finance plan
3. How to review your finances now
4. Ensure you’re redundancy package is fair
5. Understand how redundancy pay affects your tax
6. Don’t miss out on the benefits available to you
7. Post redundancy: what do I do next?
You may have saved money on travel, holidays, and other non-essentials during the lockdown. It’s generally recommended that you have sufficient funds set aside in an instant access account to meet your essential outgoings for at least three months. Being made redundant will impact on people in different ways. You should adapt your redundancy back up plan to your situation:
Replacing your job? You might just want to find another job as quickly as possible. If this is the case you can use this situation to take-stock and review your spending. If you have savings ensure you access those emergency funds in the most tax efficient way possible. You should then take a look at any remaining money being invested or put towards your retirement plan. Leaving money in the bank could be very costly to you. We will take a look at how you utilise your tax allowances and how you can invest your redundancy pay.
At retirement age? If you are at retirement age or a few years younger you might want to look at whether your redundancy pay could be used as an added cash bonus to fund your retirement. This article will explain how you can best utilise pension tax allowances and invest your redundancy pay to later draw upon an income.
Looking for a new direction? Some people use redundancy as an opportunity to change career or become self-employed and a lump sum payment could provide some much needed cash for the short-term. We ill take a look at how claiming for benefits can be an advantage for aspiring entrepreneurs.
Your main concern with being made redundant is how you are going to keep up with the bills, costs around the home, looking after your family and dealing with debt repayments. Try not to panic, the best thing you can do is sit down and get a grip of your income against outgoings. Your bank may have an app to help you but here are a few things to get you going:
Check out our guide to financial planning to understand all the areas you could look at when planning your own finances.
It is imperative that you ensure you are receiving all the monies due to you. If you have been with the same employer for two or more years, there are rules covering this. If you are a member of a union or staff association, they will advise you or point you in the right direction for the right help.
People facing redundancy will normally be entitled to statutory redundancy pay if:
When receiving a redundancy lump sum the first £30,000 will be free of tax and National Insurance. Payments of more than £30,000 will be taxable as will holiday pay, pay in lieu of notice and any other amounts that are payed out for work rather than compensation. This could push your into a higher tax band and result in lost allowances and benefits.
The order of taxation means that the redundancy package can push savings income, dividends and capital gains into higher rates, because these all sit on top of earned income. The personal savings allowance might also be reduced from £1,000 to £500, or lost altogether if total income exceeds £150,000. In the current tax year, personal allowance is wiped out when adjusted net income exceeds £125,000. Child benefit is reduced if adjusted net income exceeds £50,000 and is totally lost if it exceeds £60,000.
The standard pension annual allowance is £40,000 but can be tapered down to a minimum of £4,000 if you are a high earner. You don’t want to be caught out due to the size of your redundancy package. For this tax year, if your threshold income is more than £200,000 and adjusted income is more than £240,000, your annual allowance will be reduced. The reduction is £1 for each £2 of adjusted income over £240,000.
Advising on how tax impacts on your finances and ways to utilise allowances is the sort of thing a Chartered Financial Planner will advise you on.
Most people who were employed under PAYE will have made enough NI contributions to qualify for contributions-based Jobseeker’s Allowance, which is payable for 26 weeks regardless of savings and income. This means you won’t have to wait until you’ve used up any redundancy payments or savings. Some people feel they shouldn’t claim because they have enough money but there are really important reasons why you should:
– This will prevent any sizeable gap developing in your NI record, which could affect your pension or benefit rights in the future.
– Don’t underestimate how long it will take to get another job.
– You won’t use up as much of your redundancy remuneration. Not only will this mean the money will last longer but when your situation becomes more stable you can use remaining funds to top up your savings.
Pro Tip: If you are starting your own business, receiving JSA might mean you are eligible for the Enterprise Allowance which can provide £1,274 over 26 weeks, as well as access to mentors providing support to new entrepreneurs in completing their business plans over 12 months. The government-backed scheme also provides funding for small and medium-sized start-ups ranging from £500 to £25,000 with interest fixed at 6%.
If you have received a potential lump sum as a redundancy payment you will want to ensure you minimise any tax due. There are a few things you could consider doing to make the most of your money:
One of the most efficient ways to reduce your overall tax bill is to use some of your funds to increase your pension benefits. You should speak to your employer to see if they can pay in to your workplace pension scheme or a private pension arrangement. Any redundancy payment over the £30,000 will be regarded as pensionable income.
If you are over 55 you also have the option of immediately investing funds into a pension plan, meaning you can access 25% of what you’ve invested into your pension plan tax free. The rest can be taken as income and will be taxed at the marginal rate of tax. However, there may be further financial planning opportunities depending on your situation. A financial adviser would take a look at when the redundancy payment is made and how this would impact on your tax situation. Every financial advise client is a unique individual and a financial adviser will be able to look at your situation and find ways to make the most of the financial position you are in. For example it might be that you could live off the non-taxable portion of the redundancy payment and make a pension contribution this year. From this you would receive 40% or more tax relief on the contribution. Then we might look at how this would impact on the tax of that money when withdrawn in future years. There are infinite possibilities.
Depending on the size of redundancy payment, you could use this to generate an income as tax efficiently as possible. Alternatively if you have other sources of income lined up you could invest this money to provide a source of income for the future. It is imperative you make the most of your available tax allowances and ensure any investments are in the right name and wrapper.
Not many people consider the impact gifting has on tax. Individuals can gift up to £3,000 a year free of inheritance tax (IHT). You can also carry forward any unused allowance from the previous tax year, making a total of £6,000 per individual. This is also worth bearing in mind for people who are facing redundancy and may need support from parents or grandparents.
When you leave an employer you will no longer be an active member of their workplace pension scheme. This is an ideal time to review your overall assets and see if you could benefit from consolidating your pensions onto one platform. You will benefit from reduced costs and a wider choice of funds to meet your objectives. Pulling everything together in one place helps with managing money stresses and financial wellbeing whilst balancing the importance of a diversified portfolio.
If you are below retirement age, you should always consider maintaining pension contributions. This is especially important if you plan on becoming self-employed as you would no longer have access to a workplace pension. Up to £3,600 can still be paid annually into your pension even if you don’t have any earnings.
If you are worried about being made redundant there many practical steps we can help you take now to lessen the potential impact, such as reviewing and understanding your existing spending. Then, if you are unfortunate enough to lose your job there are ways we can help you deal with it constructively, such as making sure you don’t miss out on valuable tax allowances or helping you use your lump sum to generate an income for your retirement.
At a time when you’re most vulnerable we can help you make sure the actions you take are the right ones for your short- and long-term prosperity.
For more information on how we can help you, please contact us today
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Author & Editor: Cherie-Anne Baxter
Date: 08/07/2023
Facts and figures are correct at the date and time of writing
