It’s never an easy time when your company is forced to make redundancies. Not only is there the uncertainty of your own employment, there are looming changes to the company structure and trusted colleagues who may have to move on. But what if the choice is being put in your hands?
If your employer offers a voluntary redundancy scheme, it’s an option that you should consider. However, leaving your job is always a big decision, so it’s vital that you have all the information before you take the plunge. Here is everything you need to know about voluntary redundancy.
What Is Voluntary Redundancy?
Usually offered when a company is downsizing or restructuring, voluntary redundancy is when a company offers employees the chance to resign or their own accord instead of potentially being made redundant. Voluntary redundancy is usually incentivised with a better financial package than the employee would receive if they were let go (forced redundancy). Voluntary redundancy tends to be offered to more senior or long-term employees, but it can be offered to anyone in the company.
What will I get?
Everyone who is made redundant from their job, whether voluntarily or not, is entitled to a statutory redundancy pay. If you choose to take voluntary redundancy, you will receive a voluntary redundancy package in addition to your statutory redundancy pay.
Statutory Redundancy Pay
To be eligible for statutory redundancy you must:
- Be aged 16 or over
- Be in employment insurable according to the Social Welfare Acts. If you are 65 or under, you must also be paying Class A PRSI
- Have worked continuously for the same employer for a minimum of 2 years
You will receive a lump sum of two weeks’ pay for every year of service, plus an additional week’s pay. This payment is subject to a maximum earnings limit of €600 per week (the equivalent to (€31,200 per year). The term ‘pay’ here refers to your typical weekly salary including benefits-in-kind and average regular overtime hours but before PRSI and tax deductions. In other words, you receive statutory redundancy payments based on your gross pay.
Voluntary Redundancy Package
The ex-gratia or additional payment you receive as part of a voluntary redundancy package is up to your employer. However, like statutory redundancy pay, it is usually based on how long you have worked for the company. For instance, you might receive an extra weeks’ pay for every year of service on top of the two you are already entitled to.
What taxes do I have to pay?
You don’t have to pay any taxes on your statutory redundancy pay. However, voluntary redundancy pay is taxable, but may qualify for some tax relief. This means that a certain amount of your redundancy payment will be tax free and the balance will be taxed as part of the current year’s income. There is no PRSI liability on the balance, but you will have to pay Universal Social Charge.
You are entitled to one of the following options for tax exemption, and will receive whichever gives you the highest amount.
Basic And Increased Exemption
Basic exemption is €10,160 per person, plus €765 for every year of service. However, you are entitled to Increase Exemption of an additional €10,000 if you haven’t received a tax-free lump sum in the last 10 years and you are not getting a lump sum pension payment now or in the future.
Standard Capital Superannuation Benefit is a form of tax relief designed for people who earn a large salary and have worked at a company for a long time. It works using the following formula:
([Your average yearly salary over the past 3 years] x [Your number of years’ service] ÷ 15) – [The lump sum superannuation (occupational pension) payment received or that may be receivable]
If this formula gives you a higher amount of tax relief than Basic Exemption or Increased Exemption, then you are entitled to SCSB tax relief.
For instance, say that your annual salary is €42,000 gross and you have been with your employer 12 years with a pension lump sum entitlement of €60,000. If you are offered a voluntary redundancy package of €50,000. €15,000 of that counts as your statutory redundancy pay (two weeks’ pay for every year of service, plus an additional week’s pay) and is therefore tax free. You do not qualify for Increased Exemption as you have the lump sum pension entitlement (and it is worth much more than the €10,000 you would receive).
Of the remaining €35,000, Basic Exemption means that €19,340 is also tax free (€10,160 plus €765 for every year of service). As a result, €34,340 (statutory pay plus tax free ex-gratia pay) of the €50,000 is not taxable. That leaves €15,660 on which you will have to pay taxes.
What happens next?
Even if you decide that you would like to volunteer for redundancy, there is no guarantee that it will happen. Your employer will select the people to be made redundant out of everyone who volunteered.
Similarly, you are under no obligation to accept the voluntary redundancy package if you don’t think it is worth it. But bear in mind that your employer can still make compulsory redundancies at a later date. In that case you would no longer get the ex-gratia payment, but would still receive your statutory redundancy pay.
Before You Accept…
As well as understanding exactly what you are being offered as part of a voluntary redundancy package, you must be aware of a few other factors which could impact your decision.
Financial Position & Personal Budget Review
One of the most important things to consider is how you will manage your money going forward. Take your current financial position into account. Do you have any savings? Do you have any equity in your home? Consider also your potential cash flow going forward. If you are going to look for a new job, how long will your redundancy pay cover you for? Can you survive on just your partner’s income?
It’s a good idea to make a realistic budget, noting all of your essential monthly outgoings plus how much money you tend to spend on other things like food and entertainment. Having the numbers down in black and white will help you decide if voluntary redundancy is a sensible choice.
If you take voluntary redundancy you will no longer be able to pay into your pension. You have the option to either:
- Leave the money where it is until the normal retirement age
- Transfer the money to a new employer’s scheme when you get a new job
- Transfer the money to a Buy Out Bond, where you will have complete control over how your pension is invested
- Transfer the money to a Personal Retirement Savings Account (PRSA)
If you are over the age of 50, depending on the kind of pension scheme you are a member of, you may be able to access your pension benefits when you take voluntary redundancy.
Naturally, this is another big financial decision that you should consider carefully before acting on. Remember, all income arising from pensions in Ireland are subject to taxes in the same way as salaries. As a result, it’s crucial to factor in any deductions when working out if accessing your pension early is a feasible choice for you.
Keep in mind that you will not automatically qualify for Jobseeker’s benefits if you take voluntary redundancy, as you have essentially made yourself unemployed. This could result in a disqualification for Jobseeker’s payment for up to 9 weeks. After that time you may qualify for the Back to Work Enterprise Allowance (BTWEA) or the Back to Education Allowance (BTEA) if you meet the criteria.
If You Accept
One final point to remember is that you must get a letter from your employer confirming that you have been made redundant. Though you hopefully won’t run into any problems, having this letter will be crucial should anything happen, for instance if you don’t receive your redundancy pay in full. It may seem obvious, but when you’ve got a lot going on it’s easy for the small details to slip through the cracks.
Whether or not you decide to take a voluntary redundancy package is a personal decision that only you can make. We hope we have given you some food for thought on whether it is the right choice for you, and if you have any other questions we would be delighted to help.
SCK Group is a team of talented professionals who offer accounting and financial planning services in Ireland. We know from experience that personalised advice from a source you trust can make all the difference in those big financial decisions. So for extra peace of mind, get in touch today using our contact form and we’ll respond as soon as we can.