UPDATED PAYMENTS SCHEDULE FOR 2011-12 HERE
When a club is relegated from the Barclay’s Premier League it loses out on the lucrative TV revenue the league portions out to member clubs each year. That missing TV money represents a large percentage of even the largest club’s revenue, as we saw in the case of Manchester United and Liverpool.
Relegation is not a total loss, however, because clubs taking a trip down to the Championship are compensated through a mechanism known as parachute payments.
Who receives parachute payments?
The three clubs relegated at the end of the season are eligible to receive parachute payments from the Premier League. A club must have been able to fulfill all its fixtures in order to receive the payments.
How much do they get?
Currently relegated clubs receive £22.4m paid over two seasons. If a relegated club secures promotion back to the Premier League in the second season it does not receive the parachute payment for that year.
Why pay relegated clubs?
The rationale for sharing revenue with relegated teams is stability. Clubs must significantly increase their expenditure (whether on player wages, transfers, or stadium) to compete in the top flight, parachute payments cushion the financial blow of being cut off from the (significant) TV monies available in the EPL.
Mo’ Money, Mo’ Problems
Recently the Premier League agreed in principle to extend the parachute payments to 48m over the course of four years (£16m, for the first two years and £8m for the last two), essentially doubling the cushion for relegated clubs. While unanimously supported by the top flight members, clubs in the Football League are not all positive with some expressing fears that the increased payments will only widen the gap between the top flight and the rest of the leagues.
The Soccer CEO 
[…] there are mitigating circumstances to this analysis, such as parachute payments which do cushion the impact of relegation, the problem with panic spending in January remains […]
[…] this constitutes a sizable percentage of their income and in some cases ALL their income. While parachute payments cushion some of the impact (they are being increased) it is somewhat akin to believing that a […]
Could someone please forward this to the Blackpool Chairman!
[…] originally covered the intent and mechanism of the parachute payments here. I have updated the payment amounts to incorporate the new amounts from the May 2010 agreement and […]
What happens if are relegated to League 1 as per Portsmouth? Did they lose their entitlement?
A club continues to receive parachute payments regardless of position in the pyramid as long as they are a functioning entity.
In the case of Portsmouth this is why there was such a big fight against liquidation (among other reasons) and a ‘phoenix’ club, if this were to happen the ‘new’ Portsmouth would not receive the parachute payment.
Do clubs have to pay back parachute payments
Parachute payments are revenue sharing payments made by the EPL and not a loan of any kind, as such clubs do not have to pay the sums back at any point.