UK INCOME PROTECTION INSURANCE

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uk income protection insurance guide

The complete guide to UK income protection insurance following redundancy

You need careful planning for protecting your income if you are made redundant or become unemployed. The first step is to get a P45 form from your employer. This shows your gross pay and the amount of tax paid so far in the tax year, which runs from April to April. If you become redundant/ unemployed near the start of the tax year, you won't use up your annual personal tax allowance, so you should get a refund for each month you don't work.

The refund will be passed back as reduced tax on your salary if you become re-employed quickly. If not, you will have to fill in a tax return and wait for reimbursement at the end of the tax year. If you have been employed for two years or more, you are entitled to a statutory unemployment/redundancy payment.

This is calculated by multiplying one week's gross pay by the total number of years worked. Unfortunately redundancy caps are applied - the weekly pay is capped at £240 and the payment only applies to 20 years of service. For the years you worked aged 41 or over, that figure is multiplied by 1.5. The years worked when you were between 18 and 21 are multiplied by 0.5. Employers can be more generous than this.

The first £30,000 of any redundancy payment should be paid tax-free, and the rest is taxed at your normal rate. Redundancy benefit, now called Jobseeker's Allowance (JSA), comes in two varieties:

You will be put on to the contribution one first (type 1), worth £53.05 a week to a single person aged 25 and over, with no dependants.

To be eligible, you must have paid at least 25 weekly Class 1 NationalInsurance contributions in the year you are made redundant and the year before - or 50 contributions in both. After six months you move to the type 2 redundancy benefit, again worth £53.05 for the single person aged 25 or over. If you are nervous about redundancy, you might consider asking an independent financial advisor about suitable policies which can help to pay benefits in the event of accident, sickness or redundancy/ unemployment.

Payment cover plans can cost about £3.50 for unemployment/ redundancy cover alone and £5.50 for comprehensive cover including accident, sickness and redundancy/ unemployment per £100 of benefit.

For example, it could cost you £10.50 a month to obtain a £300 of cover for unemployment / redundancy. But beware, you generally have to be out of work for between 30 and 60 days before the plan kicks in.

The cover must have been started, in general, 60 days before you claim - and many provide cover for only 12 months.

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