Most directors facing company closure assume that redundancy pay applies only to employees. This common misconception costs people money they are entitled to. If your limited company is entering a Creditors’ Voluntary Liquidation (CVL) and you have been on the payroll, you likely qualify for director redundancy pay. Here is what you need to know.
You Are an Employee Too
The confusion usually starts here. Directors often think of themselves solely in their capacity as the person running the business, not as employees of it. But in the eyes of UK employment law, if you have been drawing a salary through PAYE and working under a contract of employment (even an informal one), you are also an employee.
That distinction matters when your company becomes insolvent. Like your staff, you have statutory rights to redundancy pay if you meet the criteria. Payments are made by the National Insurance Fund through the Redundancy Payments Service (RPS), not by the insolvent company. The company’s inability to pay debts doesn’t cancel your entitlement.
Do You Qualify? Three Questions to Ask
Eligibility for director redundancy is not automatic, but the criteria are straightforward. You will need to satisfy all three of the following:
1. Have you been employed by the company for at least two consecutive years?
Continuous employment is required. If you have been a director-employee for less than two years, you will not qualify for statutory redundancy pay, though you may still be able to claim other entitlements such as unpaid wages or holiday pay.
2. Are you on the PAYE payroll and taking a regular salary?
You must show that the payment was made through the company’s payroll system. If you only drew dividends and not a salary, this hinders your claim.
3. Does your contract require you to work at least 16 hours per week?
The Redundancy Payments Service will look at your level of involvement in the business. Directors who can show they worked at least 16 hours per week for the company are in a much stronger position.
If you answered yes to all three, you are likely eligible and should explore making a claim.
Now that we have covered who qualifies, let’s consider what directors may claim.
Director redundancy includes several types of payment, which together can be significant.
Statutory redundancy pay is calculated based on your age, length of service, and weekly wage, subject to a statutory cap (currently £643 per week). The longer you have worked for the company, and the older you are, the higher the amount. The total is tax-free up to £30,000.
Notice pay — if your employment was terminated without the proper notice period being given, you can claim statutory notice pay through the RPS.
Accrued holiday pay — any unused holiday entitlement at the point your employment ended can be claimed.
Unpaid wages — if the company owes you salary for work already carried out, you can claim up to eight weeks of unpaid wages.
The average director redundancy claim in the UK is around £9,000. For many directors, this is more than enough to cover the costs of the liquidation process itself — and in some cases, it leaves a surplus.
The Critical Point: Only a CVL Qualifies
This is where directors often go wrong. Director redundancy is only available when the company enters an insolvent liquidation — specifically a Creditors’ Voluntary Liquidation (CVL). It is not available if you close the company through a Members’ Voluntary Liquidation (MVL), a simple dissolution, or a strike-off, because those routes apply to solvent companies with no financial need.
If your company is insolvent, the route you choose affects your financial recovery. A CVL is not just legally necessary but also protects your interests.
It is also worth noting that the process has time limits. The claim should ideally commence before, or very shortly after, the company enters liquidation. Leaving it too long can complicate matters and potentially reduce what you can recover. Acting promptly, with the guidance of an insolvency practitioner, puts you in the strongest position.
Understanding how to claim is the next important step once eligibility and qualification routes are clear.
Once your company enters CVL, your insolvency practitioner will help you navigate the claims process. You will need to complete an application through the Redundancy Payments Service and provide supporting documents — typically payslips, your contract of employment, your salary details, and information about your role and hours worked.
After your claim is submitted, the Redundancy Payments Service will review your application and documents. If approved, the RPS will pay the money directly to you. For straightforward cases where all documents are in order, this can happen relatively quickly.
Do Not Leave Money on the Table
If your company is insolvent and closure is the only option, understand all available entitlements. Director redundancy pay is a statutory right designed for situations like yours.
At Connect Insolvency, we guide directors through this process. We clarify your eligibility, estimate your likely payout, and help you build a claim. Early advice improves both your financial outcome and peace of mind.
If you would like to talk through your situation, get in touch with our team today for a free, no-obligation conversation.
Connect Insolvency offers free, impartial advice to business owners facing financial pressure. Get in touch with our team today — we’re here to help, not to judge.