If you are closing a solvent company through an MVL (a form of voluntary liquidation), you may be entitled to a statutory redundancy payment as a director-employee. Most directors do not realise this.
The ones who do find out from their accountant at the eleventh hour, when the MVL paperwork is already being prepared, and they often get the eligibility conditions wrong.
The key distinction is whether you are a director only or a director who also has an employment contract with the company. If you hold an employment contract, pay yourself through PAYE, and have at least two years’ continuous service, you have the same statutory redundancy rights as any other employee.
The fact that you also control the company and are choosing to liquidate it does not disqualify you, provided the redundancy is genuine and the MVL is properly conducted. What follows sets out exactly who qualifies, how the payment is calculated, and where directors get caught out by HMRC or the liquidator when they claim redundancy in an MVL.
Quick Answer for Directors Claiming MVL Redundancy
You can claim statutory redundancy in an MVL if you meet all four conditions: a genuine employment contract with the company, PAYE pay, at least two years’ continuous employment, and a genuine redundancy (the company is closing and your role is disappearing).
The payment is calculated using the same formula as any other employee: 0.5 to 1.5 weeks’ pay per year of service, capped at £643 per week (April 2024 rate), with a maximum of 20 years’ service counted.
We advise directors to get this right before the MVL starts. HMRC scrutinises director redundancy claims because some directors attempt to create or backdate employment relationships specifically to qualify. If HMRC concludes the employment was not genuine, the payment is taxable as a distribution rather than an exempt redundancy payment, and you may face penalties on top.
Who Qualifies for Director Redundancy in an MVL
1. A genuine employment contract. You must have a written or implied contract of employment with the company. Being appointed as a director under the articles of association is not, by itself, an employment contract. The contract must set out your duties, working hours (even if flexible), reporting obligations, and terms of employment.
If you have never had a formal contract and have always been paid dividends rather than salary, you are unlikely to qualify.
2. Payment through PAYE. Your salary must be processed through the company’s payroll, with PAYE income tax and employee National Insurance deducted at source. Directors who pay themselves entirely through dividends are not employees for this purpose.
We see directors who switched from dividends to salary a few months before the MVL specifically to create PAYE history. HMRC knows this pattern and will challenge it. We have seen directors create a PAYE record six weeks before an MVL and receive a reclassification notice within months. The tax saving vanished and a penalty arrived in its place.
3. At least two years’ continuous service. The employment must be genuine and continuous for at least two years before the date of redundancy. Breaks in employment, periods where no salary was paid, or periods where the director was not actively working can interrupt continuity.
We advise directors to check their actual PAYE records, not their assumptions, because the two-year threshold is strictly enforced.
4. Genuine redundancy. The redundancy must result from the company ceasing to trade and the role disappearing. In an MVL, this is normally straightforward because the company is being wound up and all roles are being eliminated.
But if you are phoenixing, starting a new company to do the same work with the same clients, the redundancy may not be genuine. The test is whether the role has genuinely gone, not whether the company has been wound up on paper.
What Most Directors Miss
Many directors assume that switching from dividends to PAYE salary a year or two before an MVL is sufficient to establish employment. It is not enough on its own, and the timing is scrutinised. HMRC treats late-stage PAYE conversion (particularly in the 12 to 24 months before a planned MVL) as a pattern associated with engineered redundancy claims.
The Employment Income Manual (EIM12800) sets out HMRC’s position: the test is whether a genuine employment relationship existed throughout the qualifying period, not merely whether payroll was run.
Directors operating informally without a written contract, who cannot demonstrate consistent PAYE history over two or more years, or who immediately move into substantially the same work after the MVL face a high risk of full reclassification and penalty.
How Director Redundancy Pay in an MVL Is Calculated
Statutory redundancy pay uses a fixed formula based on age, length of service, and weekly pay (capped).
Under 22: 0.5 week’s pay per year of service
22 to 40: 1 week’s pay per year of service
41 and over: 1.5 weeks’ pay per year of service
Weekly pay is capped at £643 (April 2024 rate, reviewed annually). Maximum service counted is 20 years. The maximum statutory redundancy payment is therefore £19,290.
For a director aged 50 who has worked for the company for 15 years, the calculation would be: 15 years at 1.5 weeks per year = 22.5 weeks. At the £643 cap, that is £14,467.50.
The first £30,000 of a genuine redundancy payment is exempt from income tax and National Insurance under current HMRC rules. This is a significant tax advantage compared to extracting the same amount as a dividend or salary. It is one reason HMRC pays close attention to director redundancy claims in MVLs.
Tax on Director Redundancy: What HMRC Watches in an MVL
HMRC’s concern is that directors use redundancy claims to extract company funds tax-free when the payment is not genuinely redundancy. The patterns they look for include:
Directors who switched from dividends to PAYE salary shortly before the MVL
Employment contracts created or backdated close to the liquidation date
Directors who continue doing substantially the same work through a new company after the MVL
Redundancy payments that exceed the statutory formula, unless there is a pre-existing contractual entitlement to enhanced redundancy
Understanding how creditor payments are prioritised in liquidation helps explain why HMRC scrutinises these claims. If HMRC successfully challenges the redundancy, the payment is reclassified as a distribution from the company.
That means it loses its tax-free status and is taxed as income or capital gains depending on the circumstances. In some cases, we have seen HMRC apply penalties on top of the reclassified tax.
We tell every director considering this: the statutory redundancy payment in an MVL is a legitimate entitlement if the conditions are genuinely met. But it is not free money dressed up as a tax break. Treat it as what it is: compensation for losing your job. It is not a tax planning tool, and treating it as one creates risk that outweighs the benefit.
Legal Exposure
Under sections 401 to 416 of the Income Tax (Earnings and Pensions) Act 2003, the first £30,000 of a genuine redundancy payment is exempt from income tax and National Insurance.
If HMRC determines the redundancy was not genuine (because the employment relationship was constructed specifically to qualify, or because the director continues to do substantially the same work through a new entity) the entire payment is reclassified as employment income or a distribution and becomes fully taxable.
HMRC may also apply a penalty of up to 30% of the unpaid tax where the error is careless, and up to 70% where it is deliberate. The reclassification risk is not theoretical: HMRC specifically targets director redundancy claims in MVLs as a known tax planning pattern.
Enhanced Redundancy for Directors in an MVL
You can pay yourself enhanced redundancy (above the statutory minimum) if the company has a pre-existing contractual policy that provides for enhanced payments. The key word is pre-existing. A redundancy policy created specifically for the MVL, or one that applies only to directors, will be scrutinised and likely challenged.
Enhanced redundancy payments above £30,000 are subject to income tax and employer NICs. The liquidator must also be satisfied that the enhanced payment is justified and does not prejudice other creditors or the distributions to shareholders.
In a solvent MVL, creditors are not typically affected, but the liquidator still has a duty to ensure that payments are properly authorised and documented.
How the Liquidator Handles Director Redundancy in an MVL
The liquidator in an MVL is responsible for approving and making redundancy payments. They will verify your employment status, check your PAYE records, confirm your length of service, and ensure the payment is calculated correctly.
We advise discussing redundancy entitlement with the proposed liquidator before the MVL starts, because they can flag any issues with your eligibility before the process is underway.
If the liquidator is not satisfied that the redundancy is genuine, they will not approve the payment. This protects both the liquidator (who would be liable for improper payments) and you (because a payment the liquidator refuses is better than a payment HMRC later claws back with penalties).
Do
Check that you have a genuine written or implied employment contract before claiming redundancy. Directorship alone does not qualify.
Verify your PAYE history covers at least two continuous years before the redundancy date, using actual payroll records not assumptions
Discuss redundancy eligibility with the proposed liquidator before the MVL begins so issues are identified before the process is underway
Claim the statutory entitlement honestly. It is a legitimate employee right if the conditions are genuinely met.
Take tax advice from an accountant if your employment history is borderline or if you are considering enhanced redundancy above the statutory formula
Don’t
Switch from dividends to PAYE salary in the months immediately before an MVL specifically to create redundancy eligibility. HMRC identifies and challenges this pattern routinely.
Backdate an employment contract or create one for the first time close to the MVL date. The liquidator will not approve a payment based on it.
Claim redundancy if you are immediately starting a new company doing substantially the same work with the same clients. The redundancy may not be genuine.
Treat the £30,000 tax exemption as a planning tool rather than a consequence of a genuine employment ending
Rely on enhanced redundancy above the statutory formula unless a pre-existing contractual policy, predating the MVL decision, supports it
Steps Directors Should Take Before the MVL Starts
If you are planning an MVL and believe you may be entitled to statutory redundancy, take these steps before the process starts:
Check your employment contract. If you do not have a written contract, assess whether an implied contract exists based on your working arrangements, PAYE history, and the way you have been treated by the company.
Verify your PAYE records. Confirm that you have been paid through payroll with PAYE and NIC deducted for at least two continuous years.
Calculate your entitlement. Use the statutory formula and current weekly pay cap to work out the exact amount.
Discuss with your proposed liquidator. Raise the redundancy question during your initial consultation so they can confirm eligibility before the MVL begins.
Take tax advice. If you are considering enhanced redundancy or if your employment history is borderline, get specific advice from an accountant or tax adviser.
Company Debt connects directors with licensed insolvency practitioners who handle MVLs regularly and can advise on redundancy entitlement as part of the process. If you are closing a solvent company, get expert MVL advice to understand your full entitlements before committing to a route.
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Can a director claim redundancy if they are the sole shareholder?
Yes, provided the four conditions are met: genuine employment contract, PAYE salary, two years’ continuous service, and genuine redundancy. Being the sole shareholder does not disqualify you. The test is whether the employment relationship is genuine, not who owns the shares.
Is director redundancy pay tax-free?
The first £30,000 of a genuine statutory redundancy payment is exempt from income tax and National Insurance. Any amount above £30,000 is subject to income tax and, since April 2020, employer NICs. If HMRC determines that the redundancy is not genuine, the entire payment may be reclassified and taxed as a distribution.
Can I claim redundancy and also receive capital distributions from the MVL?
Yes. Redundancy is an employment entitlement; capital distribution is a shareholder entitlement. Both can be claimed in the same MVL. Redundancy is paid first (a creditor claim against the company); the surplus is then distributed to shareholders. Redundancy is tax-free up to £30,000, and capital distributions may qualify for Business Asset Disposal Relief at 10%.
What if I have been paying myself dividends instead of salary?
If you have no PAYE salary history, you are unlikely to qualify for statutory redundancy. Dividends are shareholder distributions, not employment income. Switching to PAYE shortly before an MVL specifically to create eligibility is a pattern HMRC watches for and will challenge. If you have always been paid by dividends only, the honest answer is that redundancy is probably not available to you.
How much redundancy pay can a director receive in an MVL?
The statutory maximum is currently £19,290 (based on 20 years’ service at the maximum 1.5 weeks per year, capped at £643 per week). Enhanced redundancy above this amount is possible if the company has a pre-existing contractual policy, but amounts above £30,000 total are subject to income tax and employer NICs.
