Redundancy pay is a statutory payment owed to employees who are dismissed because their employer needs to reduce the workforce. Employees with at least 2 years of continuous service are entitled to statutory redundancy pay based on their age, length of service and weekly pay.
Statutory Redundancy Pay
Eligibility
An employee qualifies for statutory redundancy pay if:
- They are an employee (not a self-employed contractor)
- They have 2 or more years of continuous service with the employer
- They are being dismissed by reason of redundancy (the job no longer exists or there is a reduced need for employees to do work of a particular kind)
- They have not unreasonably refused a suitable alternative role offered by the employer
Calculation
Statutory redundancy pay is calculated using a formula based on three factors:
| Factor | Detail |
|---|---|
| Age | Determines the multiplier for each year of service |
| Years of service | Capped at 20 years |
| Weekly pay | Capped at a statutory weekly limit, uprated each April |
Age-Based Multiplier
| Age at Date of Redundancy | Payment Per Year of Service |
|---|---|
| Under 22 | 0.5 week’s pay |
| 22 to 40 | 1.0 week’s pay |
| 41 and over | 1.5 weeks’ pay |
Example Calculation
An employee aged 45 with 12 years of service earning £600 per week, below the weekly cap:
| Service Period | Years | Rate | Amount |
|---|---|---|---|
| Ages 33–40 (22–40 band) | 8 years | 1.0 × £600 | £4,800 |
| Ages 41–44 (41+ band) | 4 years | 1.5 × £600 | £3,600 |
| Total | 12 years | £8,400 |
The maximum statutory redundancy pay is 30 weeks’ capped pay (20 years × 1.5 weeks). The current weekly cap is published on GOV.UK; for earnings above it, use the cap in the calculation.
Enhanced Redundancy Pay
Many employers offer enhanced redundancy pay above the statutory minimum. Common arrangements include:
- A multiplier of the statutory formula (e.g. double statutory)
- A flat rate per year of service (e.g. one month’s actual salary per year)
- A combination of statutory plus a fixed ex-gratia payment
Enhanced redundancy terms may be set out in the employment contract, a company redundancy policy or negotiated individually.
Tax Treatment
| Payment Type | Tax Treatment |
|---|---|
| Statutory redundancy pay | Completely tax-free |
| Enhanced redundancy pay (genuine redundancy) | Tax-free up to £30,000 |
| Payment above £30,000 | Taxed through PAYE at the employee’s marginal rate |
| Pay in lieu of notice | Fully taxable — subject to income tax and National Insurance |
| Holiday pay | Fully taxable |
The £30,000 threshold applies to the total of statutory and enhanced redundancy pay combined. Statutory redundancy pay counts towards the £30,000 exemption.
Employer NIC on Excess
Since April 2020, employer Class 1A NICs are charged on termination payments exceeding £30,000. This is in addition to the income tax charge.
The Redundancy Process
Fair Redundancy
To avoid unfair dismissal claims, employers must follow a fair process:
- Establish a genuine redundancy situation — the need for employees to do particular work has diminished
- Consult with affected employees — individually and (if 20+ employees) collectively
- Apply fair selection criteria — objective and measurable (e.g. skills, performance, attendance)
- Consider suitable alternative employment — offer any available roles before dismissing
- Allow an appeal — the employee should be able to challenge the decision
Collective Consultation
| Number at Risk | Minimum Consultation Period |
|---|---|
| 20 to 99 employees | 30 days before first dismissal |
| 100 or more employees | 45 days before first dismissal |
Collective consultation must involve recognised trade unions or elected employee representatives. The employer must also notify the Redundancy Payments Service using form HR1.
Notice Period
Redundant employees are entitled to their contractual or statutory notice period, whichever is longer. The employee can be asked to work their notice, placed on garden leave or given pay in lieu of notice.
Redundancy Pay and Payroll
Redundancy pay is processed through the final PAYE payroll run. The employer must:
- Calculate statutory and any enhanced redundancy pay
- Apply the £30,000 tax-free threshold to the redundancy element
- Tax and NIC any payment in lieu of notice as normal earnings
- Pay any accrued but untaken holiday
- Issue a P45 to the departing employee
- Report the final pay through RTI
Redundancy Pay and Accounting
Redundancy creates significant entries in the employer’s accounting records:
| Account | Debit/Credit | Description |
|---|---|---|
| Redundancy expense | Debit | Statutory and enhanced payments |
| Salary expense | Debit | Pay in lieu of notice, holiday pay |
| Employer NIC expense | Debit | NICs on taxable elements |
| Cash / bank | Credit | Payments to employees |
| PAYE liability | Credit | Tax and NICs owed to HMRC |
Provision for Redundancy
If the employer has committed to a redundancy programme before the financial year-end but not yet made the payments, a provision should be recognised in the accounts under FRS 102 (or IFRS). The provision includes:
- Estimated redundancy payments
- Associated employer NICs on amounts above £30,000
- Costs of the consultation process (e.g. outplacement services)
Claiming Redundancy Pay from the Government
If an employer is insolvent and cannot pay redundancy, employees can claim from the Redundancy Payments Service (part of the Insolvency Service). The government pays up to the statutory maximum and seeks to recover the cost from the insolvent employer’s assets.
Time Limits
Employees have 6 months from the date of dismissal to make a claim to an employment tribunal if they believe they have not received the correct redundancy pay.