Redundancy can be an unexpected twist in life that can have a serious impact on your finances. Find out what to expect, what payments you should receive and how redundancy can affect your credit report.

What is redundancy?

Redundancy is when your employer lets you go because the job you do for them is no longer needed. It usually happens when a business needs to reduce its employees in order to cut costs.

If you lose your job and then the company recruits someone else to do the same thing, that does not count as redundancy.

There are several common reasons for redundancy:

  • Your employer needs to cut their costs by reducing their staff numbers
  • The business you work for is closing down
  • The job you were hired to do is no longer needed
  • The company has been bought by another business

If you have been told by your employer that you are facing redundancy you need to ask a few questions to get a clear picture of what will happen.

Be sure to ask:

  • When your last day will be
  • What you can expect to receive in your final pay packet
  • For the details of your redundancy package
  • Whether you will you be entitled to gardening leave
  • What you will be expected to do during your redundancy period

In some cases, companies go into a consultation period before making formal redundancies. If this happens, you’ll be told you are at ‘risk of redundancy’. During the consultation your employer will look to see if they can find you a different role within the company in order to avoid letting you go. It makes sense for you to look for alternative employment in case you are eventually made redundant.

Your employer has to comply with the law when it comes to redundancy. They must consult with you before making your redundant. This means they have to tell you what is going on and give you a chance to ask questions.

They have to use a fair and objective selection process when choosing who to make redundant. You have a right to know why you were selected.

They must give you a minimum notice period based on how long you have worked for the company.

  • One week’s notice if you have been employed for under two years
  • One week’s notice for every year of employment up to 12 years
  • 12 weeks’ notice if you have worked there for 12 years or more

You are entitled to a lump sum payment to cover your minimum notice period if they do not want you to work it. You can also take paid leave to job hunt if you have been told you are facing redundancy and have worked there for more than two years.

If you have been with your employer for at least two years you qualify for a statutory redundancy payment. The minimum amount you must get is set out in law depending on how long you have worked at the company and your age.

  • Aged under 22 – You must get a minimum of half a week’s pay for each full year of continuous service.
  • Aged 22-40 – A week’s pay for each year of continuous service.
  • Aged over 41 – A week and a half’s pay for each year of continuous service.

For example if you are 42 and being made redundant from a job you’ve had for five years you would receive a week’s pay for the three years you worked there when you were under 41 and a week and a half’s pay for the two years of employment after you turned 41.

The first £30,000 of redundancy pay you receive is tax-free. You can use the Gov.UK statutory redundancy calculator to see how much redundancy pay you could be entitled to.

When you are made redundant you need to take a look at your finances and assess how you are going to pay your bills.

Start off by making a list of your debts including how much you pay each month and what it would cost to clear the debt. This is a good time to check your credit report as it lists all your debts and a summary of how much you owe.

If you have mortgage payment protection insurance, payment protection insurance, or income protection insurance, make a claim.

Work out a budget so you can see how much money you have coming in, what you need to cover household bills and your living expenses, and what is left to make repayments on your debts.

Don’t forget about your redundancy payment. It might be that you use some of that to pay off your debts.

If you are worried about being able to pay your bills speak to your bank or credit card provider. They may be able to adjust your repayment terms to help you while you find another job.

Unemployment claims in the UK are on the rise due to the knock-on effects of coronavirus. There is help available in the form of Jobseekers Allowance and Universal Credit.

Losing your job won’t have an impact on your credit score because your income doesn’t appear on your credit report.

However, if you fall behind on your repayments, start frantically applying for credit cards or loans or default on your debts that will affect your credit score. That’s why it’s important to make a financial plan and discuss your situation with your lenders before you miss a repayment.

You may also struggle to apply for credit if you are made redundant as the lender may ask for details of your income as part of your application.

Read our guide to employment and your credit score to find out more.