Managing the fallout from a loss of income is a real problem for increasing numbers of Brits, according to new figures. Preparing as much as possible ahead of time – and knowing what to expect – can keep your finances on track despite the shock.
Payroll employment was down 135,000 in the three months to November, latest Office for National Statistics data shows, 0.5% lower than a year earlier. The redundancy rate was up 1.1 percentage point at 4.9%.
Provisional figures showed a further fall of 43,000 or 0.1% in payroll employment in December, following chancellor Rachel Reeves’ tax-raising Budget. That would be the fastest fall in five years, but the data could be revised.
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The latest bleak employment data follows a leading indicator of future job cuts from the Insolvency Service this month. The jump in potential redundancies to 33,392 in the four weeks ending 14 December took the reading to the second-highest level in the post-pandemic period.
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David Little, partner in financial planning at wealth management firm Evelyn Partners, said: “Earners at all levels of seniority and across many sectors in the UK face a great deal of uncertainty, and if the worst predictions are correct we could be on the cusp of a jobs market downturn.”
Much of the roughly £66 billion in tax rises announced in the chancellor’s two Budgets is yet to feed through, he said, adding reform of business rates and a rapidly rising minimum wage are expected to hit many businesses hard.
“Combine this with the growing effects of artificial intelligence which are now feeding into firms’ hiring and firing decisions, and even though the economy is not in recession, the threat of job loss looms,” Little said.
Redundancy or a drop in income will often come out of the blue. But there are some steps people can take to help protect against losing their job or suffering a drop-off in freelance work or business revenues, and there are also strategies to cope with the financial fallout if it happens.
How to manage a sudden drop in income
1. You may need a bigger safety net
Cash in an easy access savings account is going to provide your best bet at an emergency safety net in event of a sudden drop in income – but you may need more than you think. While the typical advice is three to six months of outgoings, in this job market that may not be enough.
“I recommend my clients aim to save six to twelve months of basic expenditure as a minimum in their cash reserve for peace of mind,” said Little.
Paying the mortgage is often the main concern for those who face losing their income and this could eat into any redundancy payment if other provisions haven't been made.
“If someone has a war-chest for this key outgoing alongside other fixed monthly bills they should have more flexibility if they do face redundancy – which can in turn give them more freedom when it comes to choosing their next move work-wise,” said Little.
Aside from savings, income protection insurance policies can be very valuable in times of financial stress. Many employers include a form of income protection as a standard or optional employee benefit, but while this should cover illness and disability, it will very rarely protect against unemployment.
To protect yourself against the possibility of redundancy you can get personal stand-alone income or mortgage protection policies that are available from insurance providers and brokers.
2. What to do if you’re made redundant
Redundancy often comes as a shock. But there are a number of points you will need to address sooner rather than later. Understanding them ahead of time puts you in a stronger position. For example:
- You should receive payment in lieu of notice, so it’s important to know what your notice period is. If you don’t and can’t locate your contract, speak to your HR department.
- At this stage, if it hasn’t been offered already, you may be able to ask for gardening leave. Having this time off is a great opportunity to take a well-earned break, assess your redundancy package and make some plans.
- Next, make sure you know exactly what your redundancy pay entitlement is. There are rules around the amount of statutory redundancy pay but many companies go above this figure.
- It’s always worth considering if you can negotiate a better redundancy package. This is where it is beneficial to speak to an employment solicitor or possibly a union representative to discuss your options.
- It’s important to identify the employee benefits that will be lost through redundancy, like death in service life cover or private medical insurance, as it could be a priority to replace them with self-funded policies.
3. What is my redundancy tax situation?
There is a tax-free threshold for qualifying redundancy payments, set at £30,000, with any amount over this threshold taxable at your marginal rate of income tax. Employee National Insurance is not deducted from a redundancy payment.
For example, someone who has an annual salary of £36,000, has earned £15,000 so far this tax year and is offered £50,000 redundancy would owe £4,000 in tax on their redundancy pay.
This is because the first £30,000 of their redundancy pay is tax free but the remaining £20,000 is taxable. As they have earned £15,000 so far this year, even with the £20,000 added to this, they are still within the basic rate tax band, so tax of £4,000 is due on the redundancy pay (20% of £20,000).
Employees should also consider whether they could end up in a higher rate tax bracket, depending on their income and redundancy pay.
Payments in lieu of notice and holiday entitlement will be taxed as regular income. Depending on where you are in the tax year, and how much you earn for the remainder of it, you might be overcharged by PAYE. But it is up to you to check this and notify HMRC, and it might involve claiming back overpaid tax with a self-assessment tax return.
4. Using your pension to avoid tax
If your redundancy pay-off exceeds the tax-free amount, and you don’t need the cash right away to live on, the most straightforward option for keeping more of it is to have the excess paid into your company pension. This allows you to benefit from income tax relief and possibly National Insurance relief.
Little explained: “How you receive or claim your tax relief will depend on how the pension scheme is operated.
“While a salary sacrifice system will grant both your full income tax and employee National Insurance relief on payments automatically – with some employers passing on all or part of their National Insurance relief as well – other schemes will require the saver to claim some of their income tax relief on their tax return if they are a higher or additional rate taxpayer,” he said.
The maximum most people can pay into a pension each tax year with pension tax relief is £60,000 gross – this includes monthly contributions and any lump-sums you have already made into your pension in that tax year, whether by you, your employer or in the form of tax relief.
Personal contributions are also limited by your relevant earnings for the year. Plus the annual allowance can be tapered down for higher earners. The standard annual allowance of £60,000 reduces by £1 for every £2 of adjusted income you have above £260,000. The minimum tapered annual allowance is £10,000.
Little said: “Financial advice can be useful if you want to squeeze more into your pension by utilising carry forward allowances going back up to three tax years. In combination with salary sacrifice, large redundancy packages can turbo-charge retirement savings by massively reducing income tax and National Insurance liability.”
For some of our clients, taking this action with voluntary redundancy packages has enabled them to retire sooner, he added.
“But using carry-forward to maximise a pension contribution – and working out relevant earnings – is potentially complicated, can easily go wrong and is usually best supported by working with a financial planner,” Little said.
5. Planning for the future
Whether working and guarding against redundancy, or preparing for a potential drop in investment income that you rely on to fund your retirement lifestyle, it’s a good idea to make a financial plan to calculate how long you can comfortably remain without an income.
“Be realistic and get a complete picture of your financial situation and monthly outgoings in order to formulate a plan,” Little said. “And for this, it is hard to replicate a sophisticated cashflow model – and the support and recommendations that come with it from a good financial planner.”
