Redundancy Pay (UK)
Statutory and contractual compensation paid to UK employees who lose their jobs because their role is no longer needed, calculated based on age, weekly pay, and length of continuous service.
- What Is Redundancy Pay (UK)?
- How Statutory Redundancy Pay Is Calculated
- The Fair Redundancy Process
- Collective Consultation Requirements
- Enhanced Redundancy Packages
- Tax Treatment of Redundancy Pay in the UK
- Common Redundancy Mistakes Employers Make
- Employee Rights During Redundancy
- Frequently Asked Questions About UK Redundancy Pay
What Is Redundancy Pay (UK)?
Key Takeaways
- ✓Statutory redundancy pay is a legal entitlement for UK employees with 2+ years of continuous service whose role is genuinely eliminated (not replaced or reorganized).
- ✓The formula is based on age, weekly pay (capped at £700 from April 2024), and years of service (capped at 20 years).
- ✓Maximum statutory redundancy is approximately £21,000, which is modest. Many employers offer enhanced redundancy (2x to 4x the statutory calculation) as standard practice.
- ✓Redundancy must follow a fair process: genuine business reason, meaningful consultation, fair selection criteria, and consideration of suitable alternative roles.
- ✓Unfair redundancy (sham redundancy, discriminatory selection, or failure to follow process) can result in employment tribunal claims for unfair dismissal.
Redundancy pay is compensation that UK employers must provide when they eliminate jobs. It's not a reward for service. It's a legal recognition that the employee has lost their livelihood through no fault of their own and deserves financial support during the transition. The Employment Rights Act 1996 establishes the right to statutory redundancy pay for employees with at least 2 years of continuous service. A genuine redundancy situation exists when the employer's need for employees to carry out work of a particular kind has ceased or diminished, or is expected to. The key word is "genuine." If the employer replaces the redundant employee with someone else doing the same job, it isn't a real redundancy. It's a dismissal dressed up as a redundancy, and that's grounds for an unfair dismissal claim. Statutory redundancy pay is deliberately modest. Parliament designed it as a minimum floor, not as full compensation for job loss. Most employers, particularly large ones, offer enhanced redundancy packages that significantly exceed the statutory minimum. Enhanced packages are contractual (agreed in employment contracts or redundancy policies) and can't be reduced below the statutory entitlement.
How Statutory Redundancy Pay Is Calculated
The calculation uses three variables: age at each year of service, length of continuous service (capped at 20 years), and a week's pay (capped at £700 from April 2024).
The age-based formula
For each complete year of service: 0.5 week's pay for each year the employee was aged under 22. 1 week's pay for each year the employee was aged 22 to 40. 1.5 weeks' pay for each year the employee was aged 41 or over. The calculation works backward from the date of redundancy. Years of service are capped at 20, so the maximum number of weeks' pay is 30 (20 years x 1.5 for someone who was 41+ for all 20 years).
Worked example
Sarah is 45, has 12 years of continuous service, and earns £850 per week. Her weekly pay is capped at £700. Years aged 41-45: 4 years x 1.5 weeks = 6 weeks. Years aged 33-40: 8 years x 1 week = 8 weeks. Total: 14 weeks x £700 = £9,800 statutory redundancy pay. If Sarah's employer offers enhanced redundancy at 3x the statutory formula, she'd receive £29,400.
What counts as a week's pay
For employees with fixed hours, a week's pay is the gross weekly salary (before tax and deductions). For employees with variable hours (overtime, commission, shift patterns), the calculation uses the average weekly pay over the 12 weeks before the notice of redundancy. The cap (£700 from April 2024) means that high earners don't get proportionally higher statutory redundancy. Enhanced schemes typically use the employee's actual uncapped weekly pay.
The Fair Redundancy Process
UK employment law doesn't just require payment. It requires a fair process. Failing to follow procedure is one of the most common reasons redundancy dismissals are overturned at tribunal.
Step 1: Establish a genuine business reason
The employer must demonstrate that the need for employees to do a particular type of work has genuinely reduced. Common legitimate reasons: business closure, office or site closure, restructuring that eliminates certain roles, technology replacing manual processes, reduction in workload or revenue. The reason doesn't need to be dire. A company can make redundancies while profitable if there's a genuine operational reason. But if the company hires someone else to do the same work shortly after the redundancy, tribunals will view it skeptically.
Step 2: Identify the pool for selection
When only some employees in a group are being made redundant, the employer must define the "selection pool": the group of employees whose roles are potentially at risk. The pool should include everyone doing the same or similar work. Excluding certain people from the pool without justification can constitute unfair selection. Getting the pool wrong is a common employer mistake.
Step 3: Apply fair selection criteria
Selection criteria should be objective and measurable. Common criteria include length of service, attendance record, skills and qualifications, performance ratings, and disciplinary record. "Last in, first out" (LIFO) is legally permissible but can create indirect age discrimination claims if it disproportionately affects younger workers. Criteria should be documented, applied consistently, and scored before individual consultation begins.
Step 4: Individual consultation
The employer must meet individually with each at-risk employee to explain the situation, discuss their selection scores, listen to their representations, and consider whether suitable alternative roles exist. This isn't a formality. The consultation must be genuine. If the employee raises a valid point that could change the outcome, the employer must consider it seriously. A minimum of two meetings is considered good practice, with a gap of at least a few days between them.
Step 5: Consider alternative employment
Before confirming redundancy, the employer must search for suitable alternative vacancies across the entire organization, not just the employee's current department or location. If a suitable role exists, it should be offered. The employee has a 4-week trial period in the new role. If they reasonably refuse an alternative that's substantially different from their previous role, they retain their right to redundancy pay.
Collective Consultation Requirements
When 20 or more employees are at risk of redundancy at a single establishment, additional collective consultation obligations apply under Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992.
Consultation periods
20 to 99 proposed redundancies: consultation must begin at least 30 days before the first dismissal takes effect. 100 or more proposed redundancies: consultation must begin at least 45 days before. Consultation is with recognized trade union representatives or, if no union is recognized, elected employee representatives. The employer must provide written details (Form HR1) including the reasons for redundancy, the numbers and categories of employees affected, proposed selection criteria, and proposed timing.
What collective consultation must cover
The consultation must discuss ways to avoid redundancies (recruitment freeze, voluntary severance, reduced hours, redeployment). It must cover ways to reduce the number of dismissals and ways to mitigate the impact on affected employees. The employer must approach consultation with a genuine openness to alternatives. Going through the motions while having already made irreversible decisions is a failure to consult and can result in a protective award of up to 90 days' pay per affected employee.
The HR1 notification
Employers proposing 20+ redundancies must notify the Secretary of State (via the Redundancy Payments Service) by filing Form HR1 at least 30 or 45 days before the first dismissal, depending on the numbers. Failure to file is a criminal offense punishable by an unlimited fine. The notification doesn't need employee consent and is separate from the consultation process. It gives the government advance warning so JobCentre Plus can prepare support services.
Enhanced Redundancy Packages
Statutory redundancy pay is modest by design. Most employers, especially large ones, offer enhanced terms that go well beyond the legal minimum.
Common enhanced terms
Enhanced multipliers: 2x, 3x, or even 4x the statutory formula (so 2 or 3 weeks per year of service instead of 0.5 to 1.5 weeks). Uncapped weekly pay: using actual weekly salary instead of the £700 statutory cap. Additional lump sums: a fixed amount (often £5,000 to £20,000) on top of the formula-based calculation. Extended notice periods: paying more than the statutory notice period (which is 1 week per year of service, up to 12 weeks). Outplacement support: professional career coaching and job search assistance. Continued benefits: extended health insurance, pension contributions, or other benefits beyond the termination date.
How enhanced terms are established
Enhanced redundancy can come from several sources. Employment contracts may specify enhanced terms (common for senior roles). Company redundancy policies may set enhanced standards (but check whether the policy is contractual or discretionary). Collective agreements with trade unions often negotiate enhanced packages. One-off decisions during specific redundancy exercises. If enhanced terms have been applied consistently in previous redundancy rounds, employees may argue they have a contractual right to the same terms even if the policy says "discretionary." Courts call this "custom and practice" and it can create binding obligations.
Tax Treatment of Redundancy Pay in the UK
Redundancy payments receive favorable tax treatment up to a point. Understanding the rules helps employers structure packages efficiently and helps employees keep more of their payment.
The £30,000 tax-free exemption
The first £30,000 of a redundancy payment (including both statutory and enhanced redundancy) is tax-free under Section 401 of the Income Tax (Earnings and Pensions) Act 2003. Amounts above £30,000 are taxed as earnings (income tax and Class 1A National Insurance contributions paid by the employer). This exemption doesn't apply to payments in lieu of notice (PILON), which are always taxable. Holiday pay, commission, and bonus payments owed at termination are also taxable in full.
Post-employment notice pay (PENP)
Since April 2018, HMRC requires employers to calculate post-employment notice pay, which estimates the pay the employee would have received during their contractual notice period if they'd worked it. PENP is always taxable, even if it falls within the £30,000 threshold. This change closed a loophole where employers with short contractual notice periods would pay large amounts as "ex gratia" redundancy to maximize the tax-free benefit. HR teams must calculate PENP carefully using the formula in Section 402D ITEPA and separate it from the redundancy payment.
Common Redundancy Mistakes Employers Make
Employment tribunal claims related to redundancy are common. These are the errors that generate the most cases.
Sham redundancy
Calling a dismissal "redundancy" when the real reason is performance, conduct, or personal dislike. If the employer hires someone else for the same role within weeks, the tribunal will likely find the dismissal was unfair. The employer must prove the redundancy was genuine by showing that the need for the specific type of work has actually reduced.
Predetermined outcomes
Deciding who will be made redundant before the consultation process begins, then going through the motions of consultation. Employees can often tell when consultation isn't genuine. Evidence of predetermined outcomes (emails discussing plans before consultation started, scoring adjusted to produce a desired result) is fatal to the employer's case at tribunal.
Failing to consider alternatives
Not looking for suitable alternative employment across the wider organization. The duty to search for alternatives extends to all parts of the business, including different departments, locations, and even group companies. A large employer that doesn't check vacancies across its entire operation is taking a significant risk.
Inadequate consultation
Rushing consultation, holding a single meeting, not allowing the employee time to prepare, or not genuinely considering their representations. Good practice is at least two individual meetings with a gap of several working days between them. The employee should be allowed to bring a colleague or trade union representative.
Employee Rights During Redundancy
Employees facing redundancy have specific legal protections beyond the right to payment.
Time off to look for work
Employees with 2+ years' service who are under notice of redundancy have the right to reasonable time off during working hours to look for new employment or arrange training. The employer must pay the employee at the normal rate for this time off. "Reasonable" isn't defined in legislation but is generally interpreted as a few days during the notice period, not unlimited time.
Trial period for alternative employment
If the employer offers an alternative role, the employee has a statutory 4-week trial period. If the new role is substantially different, the trial period can be extended by written agreement. If the employee reasonably refuses the role during the trial period, they still qualify for statutory redundancy pay. If they unreasonably refuse a suitable alternative without trying it, they may lose their entitlement.
Right to appeal
While there's no statutory right to appeal a redundancy decision, ACAS best practice guidance recommends offering one. Most employers include an appeal stage in their redundancy process. The appeal should be heard by a more senior manager who wasn't involved in the original decision. Failing to offer an appeal can contribute to a finding of unfair dismissal if the case reaches tribunal.
Frequently Asked Questions
How much statutory redundancy pay am I entitled to?
Do I have to pay tax on redundancy pay?
What if my employer doesn't follow a fair process?
Can I be made redundant while on maternity leave?
What happens if my employer can't afford to pay redundancy?
Can I volunteer for redundancy?
Written by Adithyan RK