Redundancy: What payments and support are you entitled to when you lose your job?

Welcome again to our weekly On The Money newsletter on personal finance. We’ve been doing this a year now and the interest thousands of readers have shown and the questions they have sent our way has been gratifying endorsement that there’s huge interest in the area. We hope you continue to enjoy the newsletter and welcome any suggestions you may have of areas that we might look at. Get in touch at onthemoney@irishtimes.com.

This week, we’re going to take a look at redundancy. A slowing economy over the past year has meant job losses are appearing in the headlines more frequently. The technology sector has taken a beating but so too have other areas, not least the media, where RTÉ are looking to lose as many as one in five of their current staff, albeit over a number of years. The story is the same in many other sectors.

The first question on everyone’s lips, especially in the event of voluntary redundancy schemes is how many weeks of my pay will I get per year of service, but just as important is an understanding of how that money will be taxed, or not, and what happens next?

The first thing is to check whether you are entitled to redundancy: this can be an issue, especially among younger workers and in the tech sector where there can be a lot of moving between companies.

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To qualify for a minimum redundancy payment – you’ll have heard it called statutory redundancy – you need to have been working for the employer for a continuous stretch of two years in a fully insurance employment – i.e paying PRSI – and be over 16 years of age (which you’d hope to be if you’ve been working for two years).

That “continuous employment” does include periods when you are not at work because of maternity or other for of parental leave, holiday, illness or strike, or where your employment was transferred to a new owner with agreement to respect your employment rights.

How much money do I get for statutory redundancy?

In terms of how much this amounts to, it is two weeks’ pay for every year of service plus one week’s pay. However, it is important to note, especially for those on anything but basic earnings – anyone over €31,200 a year – that the maximum weekly pay taken into account under statutory redundancy pay is €600.

That’s not far ahead of the minimum wage and fractionally above what is called the living wage: it is certainly well below average earnings.

So, if you had started working for the company back in January 2020, had been earning €50,000 (or €961.53 a week) and were let go this month, you would receive €5,208 in statutory redundancy pay. That’s the weekly max of €600 times 3.84 months (they use fractional years of service) times two plus another one week at €600.

If the employer cannot pay because the company has collapsed, they contact the Department of Social Protection which will then pay you.

As you can see, it’s hardly a life-changing sum of money though it is tax free.

How much money do I get for voluntary redundancy?

In cases of voluntary redundancy, where the employer is looking to reduce headcount, they will naturally have to offer more than statutory redundancy if they want to secure volunteers. This is called a top-up payment.

You’ll have heard talk of RTÉ considering up to eight weeks’ pay per year of service (including the statutory) up to a maximum lump sum equivalent to two years’ pay, although Minister for Public Enterprise and Reform, Paschal Donohoe indicated they might be constrained to the public sector norm of six weeks.

That would very much be at the upper end of things these days. In the private sector, it depends on the individual company and any contractual agreements but it will generally be closer to four weeks’ per year of service (including the statutory) up to that limit of two years’ pay.

With the top ups, there is no €600 limit on the weekly pay that is taken into account. Instead it is your current gross pay – your normal weekly pay plus any regular overtime you might do and any benefit in kind you receive. If, like most people, you are paid monthly, you divided that monthly figure by 4.33 to get the correct weekly number.

Where the pay varies – especially for those on commission-based payment – an average over the year is taken and you work back from that.

When sorting out your “reckonable service”, it is important to note that although periods on strike or over 26 weeks of illness will count in determining whether you have reached the minimum two-year period of continuous employment, they will not count in measuring reckonable service for the purposes of calculating entitlement for actual redundancy payments.

So going back to our worker on €50,000 who joined the business back in January 2020 and is being let go now, let’s say he is working for a company that is offering four weeks’ pay per year of service, including statutory pay. They will get statutory redundancy of €5,208 as calculated above and a top up of €7,384.55 (961.53 times 3.84 times two), bringing their total redundancy payment to €12,592.58.

Are redundancy payments tax free?

Anything above statutory is not exempt from tax but there is a degree of tax relief available. There are three ways of measuring this relief and you are entitled to whichever one works best for you.

The Basic Exemption: This is €10,160 plus €765 for each complete year of service. Time worked on a job share or part-time is counted, but a career break is not. This is over and above any sum for statutory redundancy.

The Increased Exemption: You can get up to an additional €10,000 in an increased exemption if you have not received a tax free lump sum in the last 10 years and you are not getting a lump sum from your pension – either now or in the future. If you are in a pension, the exemption would be lowered by the same amount as any tax free lump sum you stand to get from the pension.

The Increase for Standard Capital Superannuation Benefit: This is a formula which is generally relevant for people generally benefits people who have longer service or are on higher pay. It takes the average of your annual earnings over the most recent three years in the job – or all your time in that company if it is less than three years. You multiply this figure by your years of service, divide the outcome by 15 and then subtract any lump sum pension payment received.

In our example, the basic exemption is higher than the amount our redundant worker on €50,000 would receive for his service since January 2020 over the statutory redundancy sum – €7,384.55 – so they do not pay any tax on their redundancy and do not have to look at the two other ways of crunching the numbers.

But if they had worked for the company for over 23 years – since January 2000 – they would be in line for a top-up payment of €84,922.33 and total redundancy pay of €90,130.33.

That top-up is clearly well in excess of the allowance under the basic exemption: €10,000 + (€765 * 23) = €25,595.

Assuming you qualify for the increased exemption because you have not had any tax free lump sum in the past decade nor any entitlement to one from your pension, you would get tax relief of €35,595. However, most people would be in line for a pension lump sum – or they should be.

Turning then to the Standard Capital Superannuation Benefit, you take his average salary over the past three years (let’s assume it has been a steady €50,000 though most people would have seen pay rises which would affect the figure), multiply it by the years of service and divide it by 15, giving you a sum of €79,466, assuming you have not had a pension lump sum. This would be the best option for our worker with long service, leaving them with a tax bill on just €5,455 and change.

Where tax is payable, the money will be included as income in the year it is paid and taxed at whatever rate would apply to income at that level. You will also pay universal social charge – but not PRSI.

Revenue should be able to tell the employer what relief you have on the lump sum but, if they don’t, you’ll get credit only for the basic exemption and will have to claim any balance due back from Revenue.

Can I get social welfare payments after redundancy?

The other thing to remember is that you will be entitled to Jobseeker’s Benefit if you do find yourself out of work and have a PRSI record.

If you are under the age of 55, there could be a gap of between one and nine weeks before you can claim Jobseeker’s Benefit depending on how much you received in redundancy. So if you got between €50,000 and €55,000, the gap is one week. It rises by one week for every additional €5,000 in redundancy until you get to nine weeks for those receiving more than €90,000 in redundancy.

If your redundancy is less than €50,000, you can receive Jobseeker’s immediately.

To qualify, you need to be unemployed as you clearly will be in this situation. There is wriggle room, allowing you to work three days a week while still claiming if you do find alternative work after being cut from your job but we’ll leave that to one side for the minute.

Otherwise, you need to be available for work and actively seeking out employment. After that, it is down to your PRSI record.

For most of us in PAYE employment – Class A PRSI – you need at least two years of contributions, 104 weekly payments since you started work. The same applies for people paying PRSI under class H (the Defence Forces) or P.

For those who are self-employed – PRSI Class S – you need a minimum of 156 weekly stamps.

Leaving the self-employed aside for a minute, other applicants need at least 39 of those PRSI weeks to be in what is called the “relevant tax year”. This is a Revenue construct that always bends my brain. We would all assume the relevant tax year to be the year you are claiming, but no, it’s not. It is in fact two years before that.

So, if you are applying for unemployment benefit after being made redundant this year, the relevant year is 2021.

Of the 39 required stamps, at least 13 must have been fully paid contributions, not credited ones.

Social Protection goes a long way to cover all eventualities so even if you cannot meet that standard, you will still qualify if you have 26 PRSI stamps in the relevant year and another 26 in the year before that.

And if you don’t meet the 13 paid stamp threshold in the relevant tax year, you can get across the line if you had 13 paid stamps in any of the current tax year, the last complete tax year, or even in the two tax years before the relevant tax year. So for our example of someone being made redundant this month, you would meet this mark if you had 13 paid PRSI stamps in any year from 2019 to 2023.

Jobseeker’s Benefit is paid for up to nine months for those who have more than 260 PRSI stamps – five years of PRSI – and for six months for those with fewer PRSI payments. After that, you can apply for Jobseeker’s Allowance but that is means tested.

You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.