Joblessness on the rise: How to protect against redundancy and manage the financial fallout from loss of earnings

Office for National Statistics data today showed that payroll employment was 155,000 in the three months to November, 0.5 per cent lower than a year earlier. The redundancy rate was up 1.1 percentage point at 4.9 per cent.

Provisional figures showed a further fall of 43,000 or 0.1 per cent 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.

The 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.[1]

David Little, Partner in Financial Planning at wealth management firm Evelyn Partners, comments:

‘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 – especially if the latest flare-up in trade tensions around Greenland is not resolved.

‘The economic outlook in the UK is not uniformly bad, with an unexpected bump up in GDP recently reported for November 2025, but it’s not great either. Economic growth is sputtering and much of the roughly £66billion in tax rises announced in the Chancellor’s two Budgets is yet to feed through. 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. At the least there seems to be a stasis in the UK jobs market with many workers prioritising job security over seeking promotion, better roles and higher pay – a malaise not helped by the increasingly inefficient burden of the income tax system.

‘The only upside of a downbeat jobs outlook is that it might spur the Bank of England into easing interest rates more rapidly.

‘Redundancy or loss of earnings is not something we like to dwell on but it’s best to “prepare for the worst and hope for the best”, as such developments can strike out of the blue. With the jobs outlook in the UK weak and employers facing a number of headwinds, it can be a good idea to make sure you can cope should a loss of earnings strike.

‘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.’

Defending against redundancy or loss of earnings

'An obvious and sensible safety net for both the employed and self-employed is a buffer of cash savings,' says David 'The amount that is deemed optimal will depend on the outgoings you need to meet and any other protections you might have in place – but also how long a period you think you would want or need if you were to lose your current job or experience a drop in earnings.

'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.

'Paying the mortgage is often the primary concern for those who face losing their earned income, and this could eat into their redundancy payment if other provision hasn’t been made. If someone has a war-chest for this key outgoing alongside other fixed monthly bills, then 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.

'Aside from savings, income protection policies can be very valuable.

'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 research personal stand-alone income or mortgage protection policies that are available from insurance providers and brokers.

'A financial planner can ensure you’re putting in place the correct protection policies for you, and your financial dependents if applicable.'

Being made redundant

David says: 'For anyone given this news it can be a shock, but there are a number of points you will need to address sooner rather than later:

•          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 and these are set out clearly on the Government’s website 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.'

Be aware of your tax situation

David says: '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.

'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.

'This like many other thresholds has been frozen for many years, making redundancy a more taxable event with every year that goes by. With income tax thresholds also in a deep freeze, it makes sense not to give too much away to HMRC, particularly from a redundancy payment that could be an important long-term boost to finances.'

Mitigating against excess tax

David adds: 'If your redundancy pay-off exceeds the tax-free amount, the most straightforward option for maximising the amount you keep is to have the excess paid into your company pension, in order to benefit from income tax and possibly National Insurance relief.

'The mechanics of this and how you receive or claim your relief will depend on how the pension scheme is operated. While a salary sacrifice system will grant both your full income tax and employee NI relief on qualifying payments automatically - with some employers passing on all or part of their NI 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.

'The maximum that most people can pay into a pension each tax year with tax relief is £60,000 gross – and this includes monthly contributions and any lump-sums that have already been made into your pension in that tax year, whether by your, your employer or in the form of tax relief.

Moreover, personal contributions are limited by your relevant earning for the year.

'The annual allowance can be tapered down for higher earners, and if you are in this position it is beneficial to seek professional help.

'Advice can also 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 NI liability. 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.

'Finally, if you are expecting to be in employment again in the same tax year, and have already used up your annual pension allowance in this way, be aware that further pension contributions – whether from auto-enrolment or otherwise – would have any tax relief that was granted clawed back. However, again you may be able to utilise carry forward allowances in this situation.

'The downside to feeding taxable redundancy payments into a pension is that the funds are locked away until private pension access age (55, rising to 57 in 2028) - which is less of an issue for those who are close to that age, although even then they will only be able to withdraw 25% of their savings tax free.

'For some of our clients, taking this action with voluntary redundancy packages has enabled them to retire sooner.'

Managing your company pension

David continues: 'Even if you aren’t concerned with feeding a redundancy payment into it, you will probably still have a company pension to think about. This can be an area often forgotten about during the stresses of the redundancy process.

'For those who don’t want to or can’t access their pension funds yet, it is simply a question of how to administer the policy – that is, leave it where it is, roll it into a new company pension or transfer it into a self-invested personal pension or similar. This decision will depend in part on the generosity of the scheme, for instance if there are any perks or benefits that will be lost by transferring out.

'In the case of final salary or defined benefit (DB) schemes, if you are offered a transfer value of more than £30,000, the law requires you to take advice on giving up your pension rights. This is because transfer values or cash-in lump sums offered by employers or scheme administrators might not adequately compensate savers for the future pension income they could forego.

'For a defined contribution pension pot, if fees are high, flexibility of income options are low or investment choices poor then there is less incentive to leave it where it is - especially if keeping it adds to a number of old pensions pots that become a headache to keep track of. At the very least check that your investment fund choices fit with your personal risk profile and retirement goals.

'For those who are 55 years of age there is the option of taking some or all of their 25% tax-free pension lump sum to help with their transition through redundancy. This could be arranged after the pot has been boosted by a salary sacrifice contribution from a redundancy package, including the tax relief top-up.

'This might be especially attractive to those who were considering retirement anyway – but it should be kept in mind that it will deplete a pension pot, leaving less for later years of retirement. It could also crystallise investment losses if done during a market downturn.'  

Managing your outgoings and planning for the future

David concludes: 'It is essential to make a financial plan for redundancy, in order to calculate how long one can comfortably remain without earned income – or for older workers, whether it is feasible to bring forward retirement.

'Prospective retirees need to be realistic and get a complete picture of their financial situation and monthly outgoings in order to formulate a retirement plan - or a phased-retirement plan that includes a continuing source of earned income. 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.'

NOTES 
[1] Management information on Advanced Notification of Redundancy Scheme - GOV.UK