How UK Statutory Redundancy Pay Is Calculated

When an employer decides a role is no longer needed, the law gives qualifying employees a right to a minimum payout. That minimum is statutory redundancy pay. It is set by Part XI of the Employment Rights Act 1996 and is separate from anything your employer may offer on top.

This guide explains who qualifies, how the amount is worked out, how tax applies, and when a redundancy can also be challenged as an unfair dismissal.

Who qualifies for statutory redundancy pay?

You qualify if all four of the following apply.

You are an employee. Statutory redundancy pay is an employee right. Workers and the genuinely self-employed are not entitled to it. If your employment status is in doubt, that question should be resolved first.

You have at least 2 years' continuous service. Service is counted from the date your employment started with that employer (or an associated employer in certain group structures). Part-time employees count on the same basis as full-time employees.

The redundancy is genuine. A redundancy situation exists when the employer's requirement for employees to carry out work of a particular kind has ceased or diminished, or is expected to. The role itself must genuinely be disappearing, not simply the person in it. Tribunals look behind the label to the reality.

You have not unreasonably refused a suitable alternative role. If your employer offers you an alternative position and you turn it down without good reason, you may lose your entitlement. Whether an alternative role was "suitable" and whether a refusal was "unreasonable" are fact-specific questions, and tribunals have found both for and against employees in similar situations.

The age-banded formula

Statutory redundancy pay is calculated using three pieces of information: your age during each year of service, your length of service, and your weekly pay.

The formula gives you a number of weeks' pay based on your age at the start of each complete year of service:

• Under 22: half a week's pay per year of service
• Age 22 to 40: one week's pay per year of service
• Age 41 and over: one and a half weeks' pay per year of service

Only the first 20 years of service count, even if you have worked longer.

The weekly pay used in the calculation is capped at a statutory limit. This cap is increased each April in line with the Retail Prices Index. Before you calculate, check the current cap at GOV.UK: Redundancy - your rights. Using an outdated figure will produce the wrong answer.

A worked example

Take someone who is 45 years old, has 8 years of service, and earns £35,000 a year. Their weekly pay is £35,000 divided by 52, which is approximately £673.

Of their 8 years of service:

• 3 years were worked from age 41 onwards, earning 1.5 weeks' pay per year: 3 x 1.5 = 4.5 weeks
• 5 years were worked between ages 37 and 40, earning 1 week per year: 5 x 1 = 5 weeks

Total: 9.5 weeks of pay.

Whether the weekly pay used is the full £673 or the capped figure depends on where the statutory cap sits at the time. If the cap is below £673, the capped figure applies. If the cap is above £673, the actual weekly pay is used.

Always use the GOV.UK redundancy pay calculator to check your own figure. It applies the current cap automatically.

Is statutory redundancy pay taxed?

Statutory redundancy pay is generally tax-free up to £30,000. This threshold applies to the combined total of all ex-gratia termination payments - meaning all payments made in connection with the end of employment that are not contractually owed to you as salary.

Two important exceptions apply.

Pay in lieu of notice (PILON) is fully taxable, regardless of the £30,000 threshold. This changed in April 2018. Even if your PILON is wrapped into a larger termination package, the notice-equivalent portion is treated as income for tax purposes.

Accrued but untaken holiday pay is also fully taxable. It represents salary you were owed and never received, so it sits outside the £30,000 exemption.

If your total ex-gratia payments (excluding PILON and holiday pay) exceed £30,000, you will pay income tax and National Insurance contributions on the excess. Enhanced redundancy payments from your employer count towards the £30,000 total alongside the statutory amount.

If you are uncertain how your package is structured for tax, HMRC guidance or an accountant's advice may be worth seeking before you accept.

Enhanced redundancy pay and settlement agreements

Many employers pay more than the statutory minimum. Some have contractual schemes that improve the formula - for example, two weeks' pay per year of service regardless of age, or no cap on weekly pay. Check your contract of employment and any staff handbook.

Enhanced amounts are often offered as part of a settlement agreement. A settlement agreement is a legally binding document in which you agree to give up employment claims in exchange for a financial payment. Before signing, you are required by law to take independent legal advice on its terms.

When evaluating an enhanced offer, the relevant comparison is the statutory floor plus the value of any tribunal claims you would be waiving. An enhanced redundancy payment alone, without considering what claims you are giving up, does not tell you whether the package is good value.

When redundancy might also be unfair dismissal

Redundancy is a potentially fair reason for dismissal, but it does not automatically make a dismissal fair. Tribunals have found dismissals were unfair even where a genuine redundancy situation existed, because the employer's process was flawed.

Common reasons a redundancy dismissal fails as a fair dismissal include:

Unfair selection criteria. If the pool of employees at risk was defined unfairly, or if the criteria used to score employees were discriminatory or applied inconsistently, the selection can be challenged.

Failure to consult properly. Employees at risk of redundancy are entitled to meaningful consultation before a final decision is made. Going through the motions without genuine dialogue is a common failure.

Failure to consider suitable alternative roles. Employers are expected to look across the business for roles the redundant employee might fill. Failing to do so, or offering only roles that are clearly unsuitable, can undermine the fairness of the dismissal.

Sham redundancy. If the role continues to exist under a different name, or is filled by someone else shortly after, a tribunal may find that the redundancy was not genuine and was instead a disguised dismissal.

If you have at least 2 years' service, you may be able to bring both a statutory redundancy pay claim and an unfair dismissal claim. The 3-months-less-1-day tribunal deadline applies to both.

The time limit for redundancy pay claims

The time limit for claiming statutory redundancy pay is 6 months from the effective date of termination. This is different from the 3-months-less-1-day limit for unfair dismissal.

A tribunal can extend the 6-month period to 18 months in exceptional circumstances, but relying on that discretion is risky. In similar situations, tribunals have required a compelling explanation for the delay.

If you are close to either deadline, ACAS Early Conciliation must be started before an employment tribunal claim can be issued. Starting Early Conciliation stops both clocks while it is in progress.

What if your employer is insolvent?

If your employer cannot pay because they are insolvent, you can apply to the National Insurance Fund via the Insolvency Service. The government will pay your statutory redundancy pay directly, subject to the same weekly pay cap and service limits that apply to the standard calculation.

You cannot recover enhanced contractual redundancy pay through the National Insurance Fund. That becomes an unsecured creditor claim in the insolvency proceedings.

This article is legal information, not legal advice. If your situation is complex - for example, if you have been offered a settlement agreement or believe your redundancy was not genuine - you may want to consider taking independent legal advice.