The financial fallout from redundancy can be a challenge and it’s rarely just about losing a job. It’s a moment that can shake your financial foundations, wipe away your sense of security, and force you to rethink your future.
Yet, it’s also an opportunity. With the right approach, you can protect your finances, preserve your lifestyle, and even pivot to something better. Whether it’s a looming possibility or an unexpected reality, having a clear financial plan can help you take control and move forward with confidence.
Redundancy pay – what will I get and how much is tax free?
The first question most people ask is: how much redundancy money will I get? If you’ve been with your employer for two years or more, you’re entitled to statutory redundancy pay. This is calculated based on your length of service, weekly pay (capped at £719 for the 2025/26 tax year) and your age at the time of redundancy. With this you’ll receive:
- Half a week’s pay for each full year worked under age 22
- One week’s pay for each year between 22 and 40
- One and a half weeks’ pay for each year over 41
Is tax payable on redundancy payments?
The maximum statutory payout is capped at £21,570 as it only takes into account of up to 20 years of service. Crucially, the first £30,000 of your redundancy pay is tax free – regardless of whether you get the legal minimum or a more generous payout from your employer. Anything above that threshold is subject to income tax, unless you take steps to mitigate it.
Redundancy packages often include more than this, though. As well as statutory or contractual redundancy pay that directly compensates for the job loss, you may also receive holiday pay, or payments in lieu of notice (PILON) which is essentially pay you receive during your notice period without working.
These additional elements are treated as earned income with both income tax and national insurance payable. Be sure to request a full breakdown from your employer to understand exactly what’s included in your lump sum, and which parts are taxable.
Build your buffer with a redundancy plan
If redundancy isn’t on the horizon, it’s still wise to prepare. One of the most effective ways to do this is by building a cash buffer – a financial safety net that covers your essential expenses for a period if your income suddenly stops.
How much is enough for a cash buffer? Financial planners typically recommend saving three to six months’ worth of core outgoings. That means mortgage or rent, utilities, food, transport, and insurance. But if you’re in an unpredictable industry or nearing retirement, consider stretching that buffer out to nine or even twelve months to be on the safe side.
This isn’t just about peace of mind – it’s about buying time. Time to find a new role that’s right for you, to retrain, or to rethink your career path without the pressure of immediate financial strain.
Safeguarding your home
For many, the biggest concern after redundancy is keeping up with mortgage payments. If you have income protection insurance or mortgage payment protection, now’s the time to check the fine print. These policies can cover a portion of your salary for a limited period, typically 12 months.
However, many policies include a deferred period before payments begin and won’t pay out if redundancy was foreseeable when the policy was taken out. If you don’t have cover, it may be too late to take it out now but it’s something to consider for the future.
In the meantime, speak to your lender. Many offer temporary solutions such as payment holidays or interest-only arrangements. The key is to act early, before arrears build up.
Hidden losses – benefits that disappear with your job
Redundancy doesn’t just affect your salary. It can strip away valuable benefits that are easy to overlook until they’re gone.
One of the most significant is death in service cover, which pays a tax-free lump sum to your loved ones if you die while employed. This benefit ends the moment your employment does, leaving a potential gap in your family’s financial protection.
You may also lose access to private medical insurance, which can include diagnostic services, and treatment. And if your employer provided critical illness cover, or other policies that pay out in the event of ill health, they too will vanish unless you arrange personal cover.
It’s worth reviewing your protection needs and considering standalone policies to replace what’s lost. A regulated financial adviser can help you find suitable alternatives tailored to your circumstances.
Consider reducing any tax bill with pension contributions
As mentioned, if your redundancy payment exceeds £30,000, the excess is taxable. But there’s a way to reduce your tax liability through pension contributions if you are confident you can use your cash buffer or other resources to tide you over – and provided you are happy to lock the money away until retirement.
By redirecting part of your taxable redundancy payment into your pension, you can potentially avoid income tax on that amount while boosting your retirement savings. This strategy works assuming you’re still within your pension annual allowance and have sufficient relevant UK earnings to support the size of the contribution. There’s also some scope for larger payments using the carry forward rules in some circumstances.
It’s a complex area, and timing is key. Contributions must be made within the same tax year, and not all elements of your redundancy package are pensionable. Again, professional advice can be invaluable.
Managing outgoings and adapting your lifestyle
Redundancy often demands a rethink of your spending habits. Start by reviewing your monthly outgoings and identifying areas to cut back. Cancel non-essential subscriptions you seldom use, renegotiate bills, and prioritise necessities.
If new employment isn’t forthcoming, you may need to make lifestyle changes such as delaying major purchases, selling assets, or even downsizing your home. It’s not easy, but it’s hopefully temporary. The goal is to stretch your resources while you regroup.
Financial planning for redundancy
Redundancy can come like a bolt from the blue and put you at a crossroads. The decisions you make about savings, pensions, investments, and spending can shape your financial future for years to come.
A qualified financial adviser can help you:
- Model cash flow to see how long your redundancy payment and other assets can support you.
- Plan your pension strategy to maximise tax efficiency or advise on a bridge into retirement with existing pots if you are over 55.
- Help you invest any lump sum wisely, based on your goals and risk tolerance.
As a first step, speaking to a financial coach could give you the answers to the questions that can get you thinking clearly about your financial future.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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