Worried about being made redundant? Here’s how to manage your finances

Since the pandemic hit, there has been wave after wave of job losses and, with no end in sight to the restrictions that have changed our way of life, Rishi Sunak’s wage subsidy scheme may not be enough to prevent more businesses cutting staff before the year is out.

If you fear the worst, or are unlucky enough to have been let go, money will be on your mind.

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“Facing redundancy can be an extremely difficult time,” says Carlos Hagi, a welfare benefit expert at the charity Citizens Advice. “You may be feeling worried about the future and uncertain of how to manage your personal finances in the weeks and months ahead.”

Fortunately, there are services out there to help, as well as things you can do to prepare for the worst.

“The best time for redundancy planning is while you’re still working and earning – well before niggling worries at the back of your mind become pressing concerns,” says Sarah Coles, a personal finance expert at the investment firm Hargreaves Lansdown. “We could all do with devising a plan B – however secure we think our job is.”

Speak to any financial adviser and they will suggest that you have three to six months’ money in a bank account that you can access without delay. That’s not the full salary for three to six months, but rather the amount you need in each month to pay for all the essentials. This means that one of your first steps, however much you earn, should be to look through your income and outgoings and draw up a budget showing you exactly what you are spending on the essentials.

It is likely that the final number will look like a lot of money to put aside. Coles says it is important not to be put off: “Anything you do now will be better than nothing.”

For some, lockdown and working from home have meant enforced savings, but if you have not been able to put anything away, have a good look at your monthly spending and see if there are ways to cut costs.

There may be things you pay for that you don’t need any more, or you may realise you need to chase up a refund or a payment from someone else. Even if you are not making discretionary purchases you can cut, it is worth looking for savings.

“Shopping around for everything from utilities to phones, insurance and groceries can help you save without making sacrifices,” says Coles. Use price-comparison sites such as comparethemarket.com or uSwitch for bills. Now that online slots for shopping are opening up, check that you are using the supermarket that offers the best deals on what you buy.

The Latest Deals app has launched a supermarket price-comparison tool that compares prices at Tesco, Asda, Sainsbury’s, Morrisons, Waitrose and Iceland – you can search for the goods you want and see where they are cheapest. Do that on the most expensive things you buy and you may find it is worth shopping somewhere different.

If you are unfortunate enough to be told that your job is being made redundant, the first thing you should do is make sure you are being offered the right sum of money.

There are rules around what employers have to pay if you have been at a company for two years or more. The sum is based on your age, your salary before tax and how long you have worked for the business. For anyone aged between 22 and 40, the minimum is one week’s pay for each full year you have been there. You are entitled to half a week’s pay for every year worked under the age of 22 and one and a half week’s pay for years aged 41-plus. The government website has a calculator you can use to check the figures.

There are limits on the weekly pay and number of years that must be taken into account; the maximum statutory redundancy payment anyone can get is £16,140. You should be paid for any holiday you have built up and not taken and for any notice period that you are due, but told not to work out.

Citizens Advice says you should make sure that you are not being paid less because you were furloughed. Even if you have been receiving only 80% of pay in recent months, your redundancy payment should be based on your full wage.

If you work in a highly paid job, and have done so for a long time, your employer may offer much more than it is obliged to legally. This is when you need to be aware of what is and what is not subject to tax, as the topline number may not be the sum you end up with in your bank account.

Up to £30,000 of a redundancy payout is not taxable – but holiday pay or pay in lieu of notice is not included in this and will be taxed as normal.

“If you are getting more than £30,000 in redundancy pay, before you touch any of it, contact HMRC and check what tax will be due on it,” says Coles. “Often it will depend on your other income for the year, so you won’t be certain of your tax bill. In these circumstances, you need to put money aside for a potential tax bill, just in case.”

You should also contact HMRC if you have paid any income tax during the year and are likely to be out of work for some time – what you have already paid in tax will be based on the assumption that you would earn the same all year, so you may be due some money back.

A tax-efficient way to take a lump sum above £30,000 is to get some of it paid into your pension. If you have a workplace pension, this could involve talking to your employer or the people who run the scheme.

“The option to pay part or all of a redundancy payment directly into a workplace pension scheme varies between employers,” says Jonathan Watts-Lay, the director of Wealth at Work, a company that offers financial advice in workplaces. “Some make it easy for redundancy pay to be paid into their workplace pension and others do not. Where the latter is the case, people will need to speak individually to the pension scheme administrator and ask if they will accept a personal lump sum contribution after their employment ends.”

Coles says you need to be certain you don’t need the money for something else first – and make sure you won’t break the rules limiting annual pension contributions if you get a new job with a similar pension scheme.

It is important to know that there is support available. Hagi says: “That could be through the benefits system, talking with your providers or getting help with existing debts.”

Citizens Advice recommends talking to your landlord (if you have one), to banks and lenders, and to service providers. “They may be able to help by reducing your payments, giving you more time to pay or, in the case of a provider, keeping you connected to their service even if you owe money,” the charity advises.

Until 31 October, you can ask a lender for a three-month payment holiday on any mortgage, loan or credit card you have. The debt will not go away, but this could give you breathing space while you look for a new job. The lender should explain the implications and any options that may suit you better.

Check if you can claim any benefits – the websites of Entitledto and Turn2Us have great calculators and are a good place to start your research. If you have more than £16,000 in savings, you won’t be eligible for universal credit, so if you get a redundancy payment this may not be an option.

If you do have enough to live on and some to spare, look at what you can do to improve your financial situation. “If you have expensive debts, it may make sense to pay them off with your lump sum,” says Coles. “You’re likely to be paying more interest on them than you’re earning on your savings.” But don’t let the cost of interest be your only guide, she warns: “Consider what this will leave you to live on until you find work, and whether it’s enough.”

Similarly, if you dream of using the cash as a launchpad for a new career, Coles says you must make sure you have done the maths. As well as paying for whatever you need to make that a reality, you will need to save enough money to live on if you are going into training or starting a business from scratch.

Whatever your financial position, Coles says you should not underestimate the emotional impact of redundancy. “Even when it doesn’t come out of the blue, it can still take time to work through the anger, frustration or rejection,” she says. “It can help enormously if you’ve already done all the thinking and planning. That way, you can just follow the plan – rather than trying to think strategically and creatively at a time when your brain would rather you crawled into bed and gave up.”