How to Calculate Redundancy Pay Under UK Law

Making someone redundant is one of the most difficult decisions an employer can face. Beyond the emotional weight of the conversation, there is a legal framework you must follow — and getting the financial side wrong can lead to tribunal claims, reputational damage, and unexpected costs. Understanding how to calculate statutory redundancy pay correctly is not optional. It is a core responsibility of running a business in the UK.

This guide walks through the rules, the calculation method, and the common situations that trip employers up.

Who qualifies for statutory redundancy pay?

Not every employee who leaves during a restructuring is entitled to statutory redundancy pay. To qualify, an employee must meet two conditions:

1. They must have been continuously employed by you for at least two years.
2. They must have been dismissed by reason of redundancy — meaning their role has genuinely ceased to exist or the business needs fewer people to do work of a particular kind.

Employees on fixed-term contracts that have run for two or more years are also covered. Contractors and agency workers engaged through their own limited companies generally are not, though the employment status tests under IR35 can complicate this.

If an employee has less than two years of continuous service, they have no statutory right to redundancy pay. You may still choose to offer an enhanced package, but you are not legally required to.

The statutory redundancy pay formula

The calculation is based on three factors: the employee's age, their length of continuous service, and their weekly pay (subject to a cap).

For each complete year of service, the employee receives:

• Half a week's pay for each full year they were under 22
• One week's pay for each full year they were aged 22 to 40
• One and a half weeks' pay for each full year they were 41 or over

The maximum number of years that count is 20, even if the employee has been with you longer. And weekly pay is capped — the current cap is reviewed annually by the government. As of April 2024, the cap stands at £643 per week, though you should always check the latest figure on GOV.UK before running your calculations.

A worked example

Consider an employee who is 45 years old and has worked for you continuously for 12 years. Their weekly pay is £580, which is below the cap, so you use the full amount.

Breaking down their service by age:

• From age 33 to 40 (7 years at one week's pay each): 7 x £580 = £4,060
• From age 41 to 45 (5 years at one and a half weeks' pay each): 5 x £870 = £4,350

Total statutory redundancy pay: £8,410.

If the same employee earned £750 per week, you would cap the weekly figure at £643 and recalculate accordingly.

What counts as a week's pay?

For employees with fixed hours and fixed pay, a week's pay is straightforward — it is their normal weekly earnings before tax and other deductions. This includes regular overtime if it is guaranteed under the contract, but not voluntary overtime.

For employees with variable hours, you calculate the average weekly pay over the 12 weeks before the date the redundancy notice was given. Weeks where the employee earned nothing (because they were on holiday or off sick, for example) are excluded, and you look further back to find 12 weeks with actual earnings.

Commission and regular bonuses that form part of normal remuneration are included. Discretionary bonuses are not.

Enhanced redundancy packages

Many employers offer more than the statutory minimum. An enhanced package might use a higher weekly pay figure (ignoring the cap), a more generous multiplier per year of service, or additional payments such as outplacement support or extended notice periods.

There is no legal requirement to offer enhanced terms, but doing so can smooth the process, reduce the risk of claims, and protect your employer brand. If you do offer enhanced terms, make sure they are documented clearly and applied consistently to avoid discrimination claims.

Tax treatment of redundancy payments

Statutory redundancy pay is tax-free. Enhanced redundancy payments are also tax-free up to £30,000. Anything above that threshold is subject to income tax and potentially employer National Insurance contributions.

Pay in lieu of notice (PILON) is treated differently. If the employment contract includes a PILON clause, the payment is taxable as earnings. If there is no contractual PILON clause and you simply pay the employee instead of making them work their notice, the position is more nuanced — but HMRC's default position since 2018 is that a sum equal to basic pay for the notice period is taxable regardless.

Getting the tax treatment wrong can result in unexpected bills for both the employer and the departing employee. It is worth taking professional advice if the total package is complex.

Notice periods and redundancy

Statutory redundancy pay is separate from notice pay. An employee who is made redundant is also entitled to their statutory or contractual notice period (whichever is longer). Statutory notice is one week per year of service, up to a maximum of 12 weeks.

You can ask the employee to work their notice, put them on garden leave, or make a payment in lieu of notice. But you cannot reduce the redundancy payment to account for the notice period — they are two distinct entitlements.

Common mistakes employers make

Failing to consult properly. If you are making 20 or more employees redundant within 90 days at a single establishment, you must follow the collective consultation rules. This means notifying the relevant government body and consulting with employee representatives. Failure to do so can result in a protective award of up to 90 days' pay per affected employee.

Using the wrong calculation date. The relevant date for the calculation is normally the date the employment ends, not the date notice is given. This affects which weekly pay cap applies and which age bracket the employee falls into.

Ignoring continuous service rules. Breaks in employment of one week or less do not break continuity. Neither do periods of maternity leave, sick leave, or secondment. If an employee was TUPE transferred from another employer, their service with the previous employer counts too.

Not putting the figures in writing. Always provide a written breakdown of how the redundancy payment was calculated. This reduces the risk of disputes and demonstrates transparency.

Redundancy and payroll software

Calculating redundancy pay for one employee is manageable with a spreadsheet. But when you are restructuring a team or an entire department, the calculations quickly become complex — especially when you factor in variable pay, TUPE transfers, and enhanced packages.

Modern payroll software can automate these calculations, apply the correct weekly pay cap, and generate the written statements your employees are entitled to. It also creates an audit trail, which is invaluable if a decision is ever challenged at tribunal.

What happens if you get it wrong?

An employee who believes they have been underpaid can bring a claim to an employment tribunal. The tribunal can order you to pay the correct amount plus interest. In cases where the employer has failed to follow a fair redundancy process, the employee may also have a claim for unfair dismissal, which can result in significantly larger awards.

The statutory cap on unfair dismissal compensation is currently £115,115 (or 52 weeks' pay, whichever is lower), but there is no cap in cases involving discrimination. Getting redundancy right from the start is far cheaper than defending a claim later.

Planning ahead

Redundancy is rarely a surprise for the employer, even if it comes as a shock to the employee. If you know that restructuring is on the horizon, start planning early. Review your employment contracts, check your enhanced redundancy policy (if you have one), and make sure your payroll records are accurate and up to date.

Having clean, reliable employee data — including start dates, pay history, and contractual terms — makes the entire process faster and less error-prone. It also demonstrates to employees and their representatives that you are taking the process seriously.

No one enjoys making redundancies. But handling the financial side correctly, transparently, and promptly is one of the most important things you can do to maintain trust with your remaining team and protect your business from legal risk.