How to handle redundancy pay

Around one in three of us are likely to be made redundant at least once during our working lives. It usually takes around 12 to 13 weeks to find a new job which means a period of three months with no salary. That's a pretty alarming prospect.

If redundancy rears its ugly head most of us will at least qualify for Statutory Redundancy Pay. To be eligible, you need at least two year's continuous service with your employer and must be over the age of 18.

The pay off you receive is based on your age, length of service and your salary with a maximum award of 20 week's pay. Here are the current limits:

For ages between 18 and 21, you'll receive 0.5 week's pay for each complete year of service. Between 22 and 40, you'll receive 1 week's pay for each complete year of service. Between 41 and 65, it's 1.5 week's pay for each complete year of service.

For the purposes of calculating redundancy payments, weekly pay is currently capped at £310 (subject to an annual up-rate) which is bad news for those who were earning more. Redundancy pay is free of tax and national insurance (NI) as long as the award you're entitled to doesn't exceed £30,000. Beyond this threshold payments will be subject to tax deductions at the normal rate. Anything else you receive as part of a redundancy package which isn't money will be converted into a cash-value for tax and NI purposes. Non-cash benefits will also count towards the £30,000 tax-free limit.

Anyone who volunteers for redundancy is still eligible for statutory redundancy pay.

You won't be entitled to Statutory Redundancy Pay if:

• You reach the age of 65 before dismissal.
• You're self-employed or the member of a partnership.
• You're a director who has a controlling interest in the company.
• You're employed in certain professions including the Armed Forces, police, parliamentary staff and Crown servants.

You could also risk your redundancy pay if:

• Your employer offers you an appropriate alternative position which you turn down without good reason.
• You leave before the end of your notice period without permission from your employer. 

For further information and guidance visit the GOV.UK website.

Most employees will only be offered the statutory minimum but larger organisations may be more generous possibly entitling you to higher non-statutory redundancy package.

If you're faced with a lump sum pay off it can be a daunting prospect even if you're not relying on this money to replace your lost income. But most of us won't be in that enviable position, so you'll need to make your money work as hard for you as possible. If you're going to live on your redundancy pay until you find a new job, it's best to put it in a high-interest current account or instant access savings account, where you can easily get hold of it if you need to.

Once you've decided on a home for your redundancy pay work out a budget. You'll probably have to tighten your belt, particularly as you don't know how long that money will need to last.

You might be in the relatively lucky position of not needing to spend your redundancy pay, perhaps if you have an alternative source of funds or you find a new job straightaway. If that's the case think about what to do with your lump sum. One option is to clear any debts or to repay some – or all – of your mortgage. While these are sensible choices make sure there are no penalties which might be incurred by redeeming your debts early.

If you're debt free you could pay your redundancy money into a pension which will enable you to benefit from tax relief on your contribution. As long as you don't exceed that limit a pension contribution could be beneficial particularly if you no longer have access to a work-based scheme. 

Next check out whether you can claim Jobseeker's Allowance (JSA). If your redundancy pay off is too high you may not qualify for income-based JSA, but you are entitled to contribution-based JSA as long as you have paid sufficient NI contributions. To claim Jobseeker's Allowance online, visit the GOV.UK website.

It's important to sign on even if you don't qualify for benefits so you don't miss out on NI credits while you have no earnings. If you have an incomplete NI record this could affect your entitlement to the State Pension and other benefits later on.

So that covers some of your key options. How you choose to deal with your redundancy pay largely depends on your own circumstances. For most of us, a redundancy pay off won't stretch far, so make sure you make the most of it – and good luck finding your next job.