Latest reports from The Office for National Statistics have indicated that Covid-19 is continuing to drive job losses across the UK. It found that for September to November 2020 the estimated UK unemployment rate for all people rose to 5%. This means that an estimated 1.72 million people were unemployed, up 418,000 on the same period the previous year and up 202,000 on the quarter.
WEALTH at work has put together an overview of some of the key areas that employees facing redundancy will need to understand:
- Taxation on redundancy payment – It is important for employees to understand how much they will actually receive once tax has been paid. Usually the first £30k is tax free, with anything over this being added to their income and charged at the marginal rate. They should also be aware that employee National Insurance is not deducted from a redundancy payment.
For example, someone who has an annual salary of £36k, has earned £15k so far this year, and is offered £50k redundancy would owe £4,000 in tax on their redundancy pay.
This is because the first £30k of their redundancy pay is tax free, but the remaining £20k is taxable. As they have earned £15k so far this year, even with the £20k added to this, they are still within the basic tax band, so tax of £4,000 is due on the redundancy pay (20% of £20k).
Employees should also consider whether they could end up in a higher tax bracket, depending on their income and redundancy pay.
- Review financial position and budget – Employees should work out what assets they have, e.g. pensions, savings, ISAs, property and investments, and what liabilities they have e.g. mortgage, debt, childcare, insurance and utility bills. Then they should look at any other household income and expenses. If the amount of money they need each month is more than the amount they have coming in, they can then work out what action they need to take to cover their costs. The Money Advice Service have has a great budget planner: www.moneyadviceservice.org.uk/en/tools/budget-planner.
- Debt repayment – If they can afford to, it might be worth employees using some of their redundancy payment to pay off expensive debts. There are many different types of debt with varying rates of interest. Credit cards and overdrafts can have rates of 18 – 40%, with payday loans having rates of 1,500% and more!
For example, a debt of £3,000 with a rate of 18% APR, could take 10 years and 10 months to pay off if paying £50 off a month, with a total interest of £3,495 paid. If that monthly payment was increased to £100 a month, the debt would be paid off in 3 years and 4 months, and interest paid would be only £908. If this was increased to £300 a month, the debt would be paid in 10 months, with total interest of £252 paid.
- Mortgage overpayment – Mortgage interest rates tend to be significantly lower than other debts, and can include payment holidays for redundancy. However, if employees don’t have other debts, it may be worth them overpaying on their mortgage.
For example, with a £200,000 mortgage which has a 3% rate of interest over 25 years, they could pay £84,527 in interest over the 25 years. If this is overpaid by £200 a month, the interest reduces to £62,905 over 19 years. If this is overpaid by £400 a month, the interest reduces to £50,209, over 15 years and 6 months, and if this is overpaid by £600 a month, the interest reduces to £41,825 over 13 years.
- Can they afford to retire? – If an employee is nearing retirement age, they may consider the idea of retiring early. Depending on their circumstances, this may be more achievable than they think. An employee could use their pension tax free cash to pay off any outstanding loans and mortgages, and as a result they may be able to maintain their standard of living.
For example, someone earning £30,000 per year, once they have paid income tax (£3,020), National Insurance (£2,460), pension contributions via salary sacrifice (£2,400), mortgage (£6,000) and loans (£2,400), they may end up with a disposable annual income of around £13,720. It can be real eye opener for employees once they realise that they may only need a retirement income of less than half of their salary to maintain their standard of living.
- What happens to their company pension? – Employees should know it is fine to keep their pension with their previous employer, and it will remain invested and safe until they retire. Some people prefer to move their pension to their new workplace pension scheme, or a private pension. There are benefits to this in that all pensions are kept together in one place, however there can be a cost to transferring a pension; investment charges are not all the same and may not be lower, and the range of investment options vary between schemes. Employees should check these things before moving their pension.
- Pay more into their pension – If they can afford to do so, it may be worth employees considering paying some of their redundancy payment into their pension to boost their retirement savings. There are limits on the tax relief they can receive from pension contributions each year, so it will be important that they check these carefully first. For those approaching retirement, this may be a particularly attractive way of providing a final boost to the value of their pension pot.
- Beware of scams – Unfortunately there are some really unscrupulous people in the world, who won’t think twice about scamming someone out of their redundancy pay. If your employees are looking for somewhere to keep their redundancy pay beyond just their current account, they must do their research. Before they hand over any money, they should always check the firm is regulated by the Financial Conduct Authority (FCA).
Jonathan Watts-Lay, Director, WEALTH at work, comments; “Employees facing redundancy need support to make the most of their finances. It can be a really challenging time, and it is crucial that they are helped to understand how to manage their finances such as how to budget, manage debt or cut down their spending and bills. It’s also important that they understand how much they will actually receive from their redundancy pay after tax, how to make it last if they don’t get a new job quickly, or how it could help them afford retirement when perhaps they thought it wasn’t a possibility. It’s encouraging that many leading companies are offering support to those who are unfortunately facing redundancy.”
For September to November 2020, an estimated 1.72 million people were unemployed, up 418,000 on the same period the previous year and up 202,000 on the quarter.
For people aged 16 years and over, for September to November 2020: the estimated UK unemployment rate for all people was 5.0%; this is 1.2 percentage points higher than a year earlier and 0.6 percentage points higher than the previous quarter