Redundancy pay in the UK: What employers must pay and how to calculate it

Published Friday 10 July 2026

Table of contents

• What is statutory redundancy pay in the UK?
• Who qualifies for redundancy pay?
• How much redundancy pay must you pay and how do you calculate it?
• When do you have to pay and what process should you follow?
• Is redundancy pay taxable?
• What if you can't pay or the business is insolvent?
• Simplify redundancy payroll and records with Xero
• FAQs on redundancy pay

Key takeaways

• Statutory redundancy pay is calculated using a week's pay, full years of service, and age-based multipliers, with a weekly pay cap of £751 and a maximum 20 years of service counting toward the total.
• Employees must have at least 2 years of continuous service and be genuine employees to qualify for redundancy pay.
• Calculate redundancy pay by determining a week's pay, counting eligible years, applying age band multipliers, and checking for any enhanced contractual terms.
• Pay redundancy on or shortly after the employee's final day, keeping it separate from PILON and holiday pay, and maintain detailed records for at least four years.

What is statutory redundancy pay in the UK?

Statutory redundancy pay is the legal minimum payment UK employers must make when making an employee redundant. It's separate from notice pay, holiday pay, and any enhanced or contractual redundancy packages your business may offer.

Redundancy pay is calculated using three key factors:

• a week's pay: subject to a statutory weekly cap (£751 as of April 2026)
• full years of continuous service – up to a maximum of 20 years
• the employee's age at the time of each service year

If your employment contract or company policy promises more generous terms, you must honour those enhanced or contractual redundancy arrangements. These top up the statutory minimum but follow the same basic calculation principles.

Statutory redundancy pay is a lump sum payment made when an employee's job is genuinely redundant, meaning the role itself is no longer required, not that the person's performance was poor.

It's designed to cushion the financial impact of job loss and recognise the employee's length of service to your business.

Statutory vs contractual redundancy pay

Statutory redundancy pay is the legal minimum the law requires you to pay. Contractual redundancy pay is any amount above that minimum, set out in your employment contract or company policy.

If your contract or staff handbook promises enhanced terms, such as two weeks' pay per year of service rather than one, you must honour those terms. The statutory formula sets the floor; your contract sets the ceiling.

To check whether your business has contractual obligations, review your employment contracts, any collective agreements with trade unions, and your staff handbook before starting any redundancy process.

Who qualifies for redundancy pay?

To receive statutory redundancy pay, you must normally be an employee who has been working for your current employer for two years or more.

To qualify for statutory redundancy pay in the UK, an employee must meet all of the following criteria:

• Employee status: They must be an employee, not a contractor, freelancer, or self-employed worker.
• Minimum service: They must have worked for you continuously for at least two years by the date their employment ends.
• Genuine redundancy: They must be dismissed by reason of redundancy – the job itself must no longer exist or be required.

If these conditions are met, the employee has a legal right to minimum redundancy pay, even if they find another job before their notice period ends.

If you're on a fixed-term contract

Employees on fixed-term contracts can qualify for statutory redundancy pay if their contract isn’t renewed and they meet the standard eligibility tests: employee status and at least two years of continuous service.

If you don't renew a fixed-term contract, the law treats this as a dismissal. If the reason for non-renewal is that the role is no longer needed, that dismissal is by reason of redundancy and triggers the right to redundancy pay.

The key conditions are:

• the employee must have worked for you continuously for at least two years by the date the contract ends
• the role must genuinely be redundant, not simply the contract term expiring for an unrelated reason
• the employee must not have signed away their right to redundancy pay, which is only permitted in limited circumstances under specific statutory rules

If your employee is on family-related leave

Employees on maternity leave, paternity leave, adoption leave, or shared parental leave have the same redundancy rights as employees who are actively at work. Being on family-related leave does not affect eligibility.

The period of leave counts as continuous service for redundancy pay purposes. Calculate the redundancy payment as if the employee had been working normally throughout their leave.

You also have additional legal obligations if you make an employee redundant while they are on maternity or adoption leave. In most cases, you must offer them any suitable alternative vacancy before offering it to other at-risk employees.

Seek employment law advice before proceeding with a redundancy during family-related leave.

Who does not qualify or could lose entitlement?

Certain situations can remove or reduce an employee's redundancy pay:

• Not an employee: Contractors, agency workers, and self-employed individuals are not entitled to statutory redundancy pay.
• Less than two years' service: If the employee hasn't completed two full years of continuous employment, they have no statutory entitlement.
• Dismissal for misconduct: If you dismiss the employee for gross misconduct during the redundancy process, they may lose their right to redundancy pay.
• Refusal of suitable alternative employment: If you offer a reasonable alternative role and the employee unreasonably refuses it, they may forfeit their redundancy pay. If the employee accepts a trial period of up to four weeks and then reasonably rejects the role, they keep their redundancy pay entitlement.

Always check the specific facts of each case. If in doubt, seek advice from an employment law solicitor or HR professional to avoid costly tribunal claims.

How much redundancy pay must you pay and how do you calculate it?

Working out how much redundancy pay you owe is straightforward once you understand the statutory formula. The calculation is based on:

• a week's pay (capped at the statutory maximum)
• full years of service (up to 20 years)
• age-based multipliers applied to each year of service

You then check whether your contract or policy offers any enhanced redundancy terms that exceed the statutory amount. If so, you must pay the higher figure.

Use the GOV.UK redundancy pay calculator to cross-check your figures and ensure accuracy. This tool is essential for validating your calculations and avoiding disputes.

How do you work out a week's pay?

A week's pay includes:

• basic salary or wages
• regular guaranteed overtime
• regular contractual bonuses or commission
• shift allowances that are guaranteed

It doesn’t include:

• non-guaranteed overtime
• discretionary bonuses
• expenses
• benefits in kind (e.g., company car, health insurance)

For employees with variable pay (for example, shift workers, commission-based roles), calculate the average weekly pay over the 12 weeks before the redundancy notice is given, excluding any weeks where no pay was earned.

How do service years and age bands affect the total?

The calculation for your redundancy pay is based on your age and length of service, ranging from half a week's pay for each year you were under 22 up to one and a half week's pay for each full year you were 41 or older.

• Under 22 years old: 0.5 weeks' pay per year
• 22 to 40 years old: 1 week's pay per year
• 41 years old and over: 1.5 weeks' pay per year

You apply the multiplier based on the employee's age during each year of service, not their current age. So if an employee worked for you from age 20 to 45, you calculate:

• Years 20–21: 0.5 × week's pay × number of years
• Years 22–40: 1 × week's pay × number of years
• Years 41–45: 1.5 × week's pay × number of years

Add these together to get the total statutory redundancy pay.

What caps and limits apply?

However, there are caps on the amount an employee can receive. The maximum weekly pay used in the calculation is £751, and the maximum total statutory redundancy pay is £22,530.

It's worth noting that the length of service used in the calculation is also capped, with statutory pay calculations only considering the last 20 years that the employee has worked for you.

• Weekly pay cap: £751 (April 2026)
• Service year cap: maximum 20 years of service count
• Statutory maximum: The highest possible statutory redundancy pay is £22,530 (£751 × 1.5 × 20).

These caps mean that even long-serving, high-earning employees will not receive more than the statutory maximum unless your contract or policy offers enhanced terms.

How to calculate statutory redundancy pay

Use these steps to calculate statutory redundancy pay:

1. Work out the employee's average week's pay, applying the statutory weekly cap.
2. Count the number of full years of continuous service (up to 20 years).
3. Split each year of service into the correct age band and apply the right multiplier (0.5, 1, or 1.5 weeks).
4. Add the amounts for each age band to get the statutory total.
5. Check the contract or policy for any enhanced redundancy terms and pay the higher amount if applicable.

Example calculation

Here’s an example scenario: An employee aged 43 has worked for you for 12 complete years. Their average weekly pay is £600.

1. Determine a week's pay.

£600 per week (under the £751 cap, so use £600).

1. Count eligible years and apply age bands.

Assume the employee was aged 31–42 during their service:

Years 31–40 (10 years): 1 × £600 × 10 = £6,000Years 41–42 (2 years): 1.5 × £600 × 2 = £1,800

1. Add totals.

£6,000 + £1,800 = £7,800 statutory redundancy pay

1. Check for enhanced terms.If your contract says you pay 2 weeks per year of service, recalculate accordingly and pay the higher amount.
2. Cross-check. Cross-check with the GOV.UK calculator to ensure calculations are accurate.

How do PILON and holiday pay affect redundancy pay?

Redundancy pay must be kept separate from:

• Pay in lieu of notice (PILON): Payment for the notice period the employee does not work.
• Accrued holiday pay: Payment for unused annual leave up to the termination date.

All three payments — redundancy pay, PILON, and holiday pay — must be calculated and paid, but they are separate line items on the final payslip. PILON and holiday pay are processed through payroll and subject to income tax and National Insurance. Redundancy pay up to £30,000 is tax-free (see below).

Keep each payment clearly labelled in your records to avoid confusion and ensure correct tax treatment.

When do you have to pay and what process should you follow?

Redundancy pay must be paid on or shortly after the employee's final day of employment. Most employers include it in the final payslip, alongside PILON and holiday pay, to keep everything transparent and on record.

Follow these steps to ensure a compliant and fair redundancy process:

1. Confirm selection and consult appropriately

Ensure the redundancy is genuine and that you have followed a fair selection process. If you are making 20 or more employees redundant within 90 days, you must carry out collective consultation.

For fewer than 20, individual consultation is required. This step protects both your business and your employees by ensuring the redundancy is legally sound and procedurally fair.

2. Issue a written redundancy notice and calculation

Give the employee written notice of redundancy, including the redundancy pay calculation breakdown. Show a week's pay, years of service, age bands, and the total amount. This transparency helps avoid disputes and gives the employee time to understand their entitlement and plan their next steps.

3. Run final pay: redundancy, PILON, holiday pay, and any other sums owed

Process the final payroll run, ensuring redundancy pay, PILON, and holiday pay are calculated correctly and listed as separate items. Include any outstanding expenses, bonuses, or other contractual payments. Double-check all calculations to avoid costly errors or disputes later.

4. Pay on the agreed date and provide a payslip for taxable items

Pay the employee on their usual payday or the last day of employment. Provide a detailed payslip showing gross pay, deductions, and net pay for taxable items (PILON, holiday pay). Redundancy pay up to £30,000 does not appear on the payslip as taxable income, so keep this clearly separated.

5. Store all documents and calculations

Keep copies of the redundancy notice, calculation, consultation notes, and final payslips for at least four years. You may need these if the employee queries the payment or if HMRC requests records. Proper documentation protects your business and demonstrates compliance with employment law.

Maintain clear, organised records throughout. If you use payroll software, ensure it can handle final payments and separate redundancy pay from taxable earnings.

Is redundancy pay taxable?

One silver lining is that you do not usually pay tax on the first combined £30,000 of statutory redundancy pay and other qualifying termination payments. Any amount above this threshold is subject to income tax only.

Employees do not pay National Insurance on redundancy payments, even above £30,000. However, employers must pay Class 1A National Insurance on any amount above £30,000.

Here's how it works:

• Up to £30,000: Tax-free. This applies to the total of statutory redundancy pay plus any enhanced redundancy payment.
• Above £30,000: The excess is taxable as employment income and subject to PAYE. Employees do not pay National Insurance on redundancy pay, but employers pay Class 1A National Insurance on the excess.

The rate of tax on redundancy pay above £30,000 depends on the employee's income tax band. Basic-rate taxpayers pay 20% of the excess. Higher-rate taxpayers pay 40% on amounts that fall within the higher-rate band. Additional-rate taxpayers pay 45%.

If an employee also receives a non-cash benefit as part of their redundancy settlement, for example, a company car they keep, the value of that benefit is added to the redundancy payment when calculating how much of the total exceeds the £30,000 threshold.

PILON and holiday pay are always taxable, regardless of the £30,000 threshold. They must be processed through payroll with the correct tax and NI deductions.

Practical example

An employee receives:

• Statutory redundancy pay: £10,000
• Enhanced redundancy pay: £15,000
• PILON: £3,000
• Holiday pay: £1,200

Tax treatment:

• Total redundancy pay: £10,000 + £15,000 = £25,000 (tax-free, under £30,000)
• PILON: £3,000 (taxable)
• Holiday pay: £1,200 (taxable)

The employee receives £25,000 tax-free, and £4,200 is processed through payroll with tax and NI deducted.

Get professional advice

Tax rules can be complex, especially if the employee has multiple sources of income or receives a large redundancy package. Advise employees to seek independent tax advice, and consult your accountant to ensure you process payments correctly and report them to HMRC.

Keep redundancy pay, PILON, and holiday pay as separate items on all records and payslips to maintain clarity and compliance.

What if you can’t pay or the business is insolvent?

If your business cannot afford to pay redundancy, or if it's insolvent, employees can claim statutory redundancy pay from the government's Redundancy Payments Service.

If you fail to pay or an employee disagrees with the amount, they have three months from the date their employment ended to make a claim to an employment tribunal. In insolvency cases, employees may also be able to claim through the Redundancy Payments Service, which has a separate six-month deadline.

Act early and communicate

If cash flow is tight, talk to your employees as soon as possible. Explain the situation honestly and seek professional advice from an insolvency practitioner or employment lawyer. Being open about financial difficulties early helps you manage redundancies more fairly and stay compliant.

Redundancy Payments Service

If your business enters insolvency (administration, liquidation, or receivership), your employees can claim the following from the government:

• statutory redundancy pay
• unpaid wages (up to 8 weeks)
• accrued holiday pay
• notice pay (up to the statutory minimum)

Employees must submit their claim within six months of their employment ending. The government will pay these amounts directly to the employee, subject to statutory caps.

Your responsibilities

Even if the business is insolvent, you must:

• Provide accurate records of employment, pay, and service.
• Issue redundancy notices and calculations.
• Cooperate with the insolvency practitioner or liquidator.

Failure to keep proper records can delay or reduce employees' claims, and you may face personal liability if you are found to have acted negligently or fraudulently.

For more guidance, see the GOV.UK page on claiming redundancy pay.

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FAQs on redundancy pay

This section answers common questions about redundancy pay to help you navigate eligibility, calculations, and special circumstances with confidence.

Do part-time employees get redundancy pay?

Yes. If your part-time employee has at least two years' continuous service, calculate redundancy pay using their actual average weekly pay.

Can laid-off employees claim redundancy pay?

If you temporarily lay an employee off (without pay or with less than half a week's pay) for either more than 4 weeks in a row or more than 6 non-consecutive weeks in a 13-week period, they may claim statutory redundancy pay.

Does overtime count in a week's pay?

Only guaranteed and contractual overtime counts toward a week's pay for redundancy purposes. Non-guaranteed or voluntary overtime does not count. If an employee regularly works guaranteed overtime, include it in the weekly pay calculation.

How many weeks' redundancy pay per year of service?

It depends on the employee's age during each year of service. Employees under 22 receive 0.5 weeks' pay per year, those aged 22–40 receive one week's pay per year, and those aged 41 and over receive 1.5 weeks' pay per year. The maximum is 20 years of service.

Does maternity or sick leave affect redundancy pay?

No. Periods of maternity leave, paternity leave, or sick leave count as continuous service for redundancy pay purposes. Calculate the redundancy payment as if the employee had been working normally throughout these periods.

Is redundancy taxed at 40%?

Redundancy pay above £30,000 is taxed at the employee's marginal income tax rate. For higher-rate taxpayers, that means 40% on the portion of redundancy pay that exceeds the threshold.

How many months' salary is redundancy pay?

Redundancy pay isn't calculated in months. It's based on weeks of pay, capped at £751 per week, multiplied by years of service and an age-based multiplier. The maximum statutory amount is £22,530, which works out to 30 capped weekly payments.