Director's Redundancy Pay vs Employee Redundancy Pay UK 2026
When a limited company closes or restructures, whether a director can claim redundancy pay depends entirely on whether they hold genuine employee status -- not on their job title. Here is how director redundancy compares with standard employee redundancy for 2026/27, including insolvency claims and tax treatment.
The core difference: employee status, not job title
Statutory redundancy pay is a right attached to employees, not to directors as such. A standard employee -- someone hired under a contract of employment, paid through PAYE, working under the direction of the employer -- automatically qualifies once they have two years' continuous service and are genuinely made redundant.
A company director only qualifies on the same terms if they can show they were also an employee: a genuine employment contract, PAYE salary, and subordination to the company (typically the board, even if the director sits on that board). Many owner-directors of small limited companies structure themselves exactly this way -- salary plus dividends -- precisely so that employee protections, including redundancy pay, apply if the company fails.
Who qualifies for statutory redundancy pay?
- At least two years' continuous employment with the employer
- Genuine redundancy situation: role, workplace or need for employees has ceased or diminished
- Employee (or employee-director) status -- not a self-employed consultant or non-executive director with no employment contract
- Not disqualified by gross misconduct dismissal or unreasonable refusal of suitable alternative employment
For directors, HMRC and the Redundancy Payments Service look at the same substance-over-form test used across employment law: is there a written contract, regular PAYE salary, set hours or duties, and genuine subordination to a controlling body? A director who only ever drew dividends, with no PAYE record and no employment contract, has no redundancy claim -- there was never an employment relationship to make redundant.
Claiming when the company is insolvent
When a company cannot pay redundancy money itself because it has entered liquidation or administration, both ordinary employees and qualifying director-employees can claim statutory redundancy pay, unpaid wages, holiday pay and notice pay from the National Insurance Fund, via the Redundancy Payments Service (RPS) administered through gov.uk.
Director claims to the RPS attract closer scrutiny than ordinary employee claims, particularly for majority shareholder-directors or sole directors, because the RPS wants to establish that the individual was genuinely an employee and that the redundancy was not simply a voluntary decision by someone who controlled the company. Claims are commonly supported by an insolvency practitioner's report confirming employment status.
Tax treatment: identical rules apply
- First GBP 30,000 of a genuine redundancy payment: free of Income Tax and employee National Insurance for directors and employees alike
- Amounts above GBP 30,000: subject to Income Tax at the recipient's marginal rate (20%/40%/45%)
- Employer Class 1A NI (since April 2025) applies to the employer on amounts above GBP 30,000, for both director and non-director employees
- Statutory redundancy pay itself is calculated the same way -- age-weighted multiplier x capped weekly pay x complete years of service (max 20 years)
Director vs employee redundancy: side by side
| Feature | Director-employee | Standard employee |
|---|---|---|
| Eligibility test | Must prove genuine employment contract | Assumed from PAYE contract |
| Qualifying service | 2 years, same as employees | 2 years |
| RPS scrutiny on insolvency | Higher, especially for majority shareholders | Standard |
| Tax-free element | First GBP 30,000 | First GBP 30,000 |
| Calculation method | Age-weighted x capped weekly pay x years | Same formula |
| Sole director closing own company | Contested -- specialist advice needed | n/a |