Easing the pain of redundancy

Changes which came in this week allow industrial tribunals to award up to £50,000 for people unfairly dismissed, a dramatic increase from the previous £12,000 limit. What is more, former employees can now go to the tribunals after one year in a job, not two. Plenty of eased-out middle managers or senior staff may feel unfairly dismissed, but almost none will take action. They just have to negotiate the best deal they can.

Changes which came in this week allow industrial tribunals to award up to £50,000 for people unfairly dismissed, a dramatic increase from the previous £12,000 limit. What is more, former employees can now go to the tribunals after one year in a job, not two. Plenty of eased-out middle managers or senior staff may feel unfairly dismissed, but almost none will take action. They just have to negotiate the best deal they can.

The first terms on offer usually depend on your age and number of years you have been with the firm. Getting them improved is much easier if you are on your own, or part of a small group - and not caught in a whirlwind of downsizing.

People in management usually have various fringe benefits, anything from dental insurance to a company car. When they leave, those benefits disappear. So anyone planning to negotiate better terms needs to work out how much those benefits will cost to replace.

Losing your company car will be expensive. Most firms providing them will pay for running costs - including servicing, repairs and insurance as well as petrol. If you combine those figures with the car itself, the figures are impressive. The AA calculates that having a typical mid-range company car like a 1,400 to 2,000cc Mondeo is worth almost £4,550 a year.

Group health insurance will be expensive to replace, even if you pay some, or all of the premiums in your work scheme. They normally come at a 40 per cent discount in a company scheme, so getting equivalent cover will not be easy.

"There'll probably be temporary help," says Penny O'Nions, a doctor turned independent financial adviser. "BUPA, PPP and the others will probably let you have a 20 per cent discount in the first year after leaving work, but that drops to 10 per in year two - and disappears 12 months later. "Admittedly, taking out cover via a separate group scheme - through a professional organisation or indeed a golf club - can bring some cost savings. But insurers won't be sympathetic about existing medical worries, like heart trouble or spinal problems, if you join a new scheme."

Senior staff sometimes get free dental insurance. That can produce real problems if you leave, because few dental practices will accept new NHS patients. So you will have to choose between alternative cover, or paying for treatment as and when it arises.

Those perks are easy to remember. Death in service benefits are more obscure, but well worth having. They guarantee that if you die while working for the firm, your widow - or widower - will get a lump tax-free sum worth between three and four times your pre-tax salary. Accident, sickness and disability cover, which some companies provide, is equally easy to forget.

How do you assess what all these benefits are worth? By making a few telephone calls, says David Rothenberg of accountants Blick Rothenberg.

"Ring round two or three insurers, or other groups providing them and see what they would charge if you had to buy them on your own" he says. "But don't forget to bring tax into the picture."

Tax rules for "benefits in kind" are easy. Your employer works out what your particular benefits are worth, and you are taxed on them at whatever your tax rate. So free health or dental insurance is not quite free, even if you do not pay anything towards it. The costs do come at a 77 per cent discount (if you pay tax at the 23 per cent basic rate). Even as a higher rate taxpayer, you get a 60 per cent saving. Once you leave work, you pay those bills in full. So you need to boost your figures to allow for it.

Making that adjustment may be useful. But ensuring the normal tax rules covering redundancy payments apply in your case is more important. Normally, the first £30,000 of any payments will be tax-free, but there are always pitfalls.

There will be no tax-free money for people with a service agreement, where the original contract lays down the compensation terms if they leave within a fixed time. You will also lose if your original employment contract gives your company the right to pay you off instead of giving you notice. If tax offices believe your redundancy is actually early retirement under another name, there will be no tax concessions either.

No one wants to leave as redundant. Many come to private understandings to leave. That should not prevent them from getting the first £30,000 tax free if the Inland Revenue does not argue that the deal is part of the employment arrangements.

How can people avoid snares and negotiate from a position of strength? Move one is to see the initial terms on offer as just an opening bid. Move two is to check that the agreement under which you leave will guarantee that the first £30,000 you receive is tax-free.

The area is a minefield, so if in doubt talk to an accountant or solicitor. In this context, the fees are not so much a cost as an investment.