Making staff redundant: redundancy pay and entitlement

Ask any employee facing redundancy what worries them most, and loss of income is almost always at the top of the list. After redundancy, people can take many months to secure their next role, and redundancy pay entitlement is an essential safety net.

Employers who are making staff redundant must handle redundancy pay carefully. Getting the figures right matters for legal compliance, but it also matters for your people. Clear, accurate numbers help reduce anxiety. And alongside a fair redundancy consultation process, they show employees that you’re acting transparently at a difficult time.  

 

Skip to: 

• What it means to make someone redundant

• How much statutory redundancy pay entitlement is

• How to calculate redundancy pay entitlement

• What to include in a written statement to your employees

• Common FAQs about making staff redundant 
  
  

What does it mean to make staff redundant?

 

Under the Employment Rights Act 1996, redundancy applies when an employee’s job genuinely no longer exists. This could happen for a variety of business reasons, such as:

 

• Your business closes or relocates

• There’s less work of a particular kind

• Technology or restructuring removes the need for certain roles

• The business needs fewer people to do the same work

 

In other words, redundancy is about the role, not the person. It isn’t the same as dismissal for misconduct, capability, or poor performance, which all follow different legal processes.

Redundancy also comes with specific legal rights and redundancy pay entitlement is one of the most important. To receive statutory redundancy pay, an employee must:

 

• Be legally classed as an employee (rather than a contractor, for example)

• Have at least two years of continuous employment by the relevant date

• Be dismissed specifically because of redundancy

 

 

What redundancy pay entitlement do employees have?

 

Redundancy pay is a financial payment you make to employees whose roles are no longer needed. It’s designed to compensate the affected employee for the loss of work and provide a financial buffer while they look for their next role.

There are several types of redundancy payments you may need to make, depending on your business situation and what your employment contracts say. Below, we break down what employers must pay and what they can choose to offer.

 

Statutory redundancy pay

 

Statutory redundancy pay is the legal minimum amount you must pay eligible employees when making staff redundant. The formula for statutory redundancy pay is based on the employee’s age, how much they earn, and how long they’ve worked for you.

 

How statutory redundancy pay is calculated

 

• Half a week’s pay for each full year worked for the business under age 22

• One week’s full pay for each full year worked for the business aged 22-40

• One and a half weeks' full pay for each full year worked for the business aged 41 and over

Statutory limits for redundancy pay

 

• Maximum length of service: 20 years

• Statutory maximum weekly service: £751

• Maximum statutory redundancy payment: £22,530

Your employee’s weekly pay is based on the average they earned over the 12 weeks before the day they received their redundancy notice.

Note: Statutory redundancy pay rates may be different in Northern Ireland.

 

Tax rules for redundancy pay

 

• Tax-free amount: Redundancy pay isn’t subject to tax or national insurance up to £30,000.

• Taxable payments: Holiday pay or payment in lieu of notice as part of any redundancy package is taxable.

 

Contractual pay

 

Some employers choose to offer enhanced or contractual redundancy pay. This is any payment above the statutory minimum. Enhanced redundancy pay might be set out in an employment contract, staff handbook, or a company redundancy policy, and if it is, you’re legally required to honour it.

So, why do some companies pay extra redundancy pay? Businesses offer enhanced redundancy pay for a few reasons:

• Retention and goodwill: Generous terms can maintain morale throughout a restructure, and encourage people to stay engaged until their final working day.

• Culture and fairness: Some organisations feel a responsibility to support long-serving or lower-paid employees by offering a stronger financial cushion.

• Employer brand: Clear, supportive policies can strengthen your reputation, which helps with retaining existing staff and recruiting future hires.  

If you choose to offer contractual redundancy pay, you must define it in writing so everyone knows what they’re entitled to long before a redundancy situation arises. It’s not something employers should decide on an ad-hoc basis, as inconsistency can lead to disputes or claims of unfair treatment.

 

Other payments owed when employment ends

 

When someone’s role comes to an end, redundancy pay isn’t the only payment required. You’ll also need to settle any final amounts owed, including:

 

• Notice pay: Employees are entitled to a statutory notice period (or contractual notice if longer). Payment is due at their normal rate.

• Pay in lieu of notice (PILON): If you don’t require someone to work their notice, you can end employment immediately and pay them the full value of their notice period instead, provided their contract allows for PILON.

• Holiday pay: Any untaken statutory holiday must be paid in full. You can’t ask someone to “use up” holiday once they’re no longer working their notice.

• Other money the employer owes: The extra payment may include bonuses already earned, commission payments, or outstanding expenses owed before their employment ends.

 

How do you calculate redundancy pay entitlement?

 

Once you know an employee is eligible, you can work out their redundancy pay by following a few simple steps. Redundancy pay is based on three factors: the employee’s age, length of continuous employment, and their weekly pay.

 

Step 1. Work out a week’s pay

 

Before calculating anything else, you need to know the employee’s “weekly pay” for redundancy purposes, which can’t be more than the statutory weekly limit (currently £751). For an accurate calculation:

 

• Use their average weekly earnings from the 12 weeks before you gave them redundancy notice

• Include regular wages, overtime that’s guaranteed, and normal contractual payments

• Exclude irregular bonuses or overtime that isn’t guaranteed

 

Tip: Weekly pay may differ from “normal pay” if someone’s earnings fluctuate, if their earnings include commission, or if they work variable hours.

 

Step 2. Apply the statutory formula

 

Next, multiply their week’s pay by the number of years they’ve worked for you, up to 20 years, using the rates set out in employment law:

 

• 0.5 week’s pay for each full year worked under age 22

• 1 week’s pay for each full year worked aged 22-40

• 1.5 weeks’ pay for each full year worked aged 41+

 

This gives you the total number of “weeks” the employee is entitled to be paid.

 

Step 3. Calculate redundancy pay using the relevant date

 

Your calculation must be based on how long the employee has worked for the business up to the ‘relevant date’, which is usually the final day of employment. In some cases, like fixed-term contracts ending early or short-time working, the relevant date may shift slightly, which affects the number of full years you count.

Our redundancy pay calculator makes the maths involved with redundancies easier, so you’re always working with accurate numbers.

 

 

Step 4. Check if redundancy is tax-free

 

Redundancy pay itself is tax-free up to £30,000. Other payments that may sit alongside redundancy, such as notice pay or holiday pay, are taxable in the usual way.

 

Examples of redundancy calculations

 

Example 1:

 

David is 38 and has worked for your company for 10 years and three months. He’s entitled to 10 weeks’ statutory redundancy pay (1 week’s pay for each full year that he’s worked for your company while aged 22-40).

He works a 40-hour week and earns an annual salary of £28,000, which is equivalent to £538.46 per week. His redundancy pay will be £5,384.60.

 

Example 2:

 

Katie is 24 and has worked for your company for three years. Her statutory redundancy entitlement is 2.5 weeks’ pay, made up of:

 

• 0.5 week’s pay for one full year when she was under 22

• 1 week’s pay for each full year when she was aged 22 or over

 

She works a 40-hour week and earns an annual salary of £26,000, which is equivalent to £500. So, her redundancy payout is £1,250.

What to include in a written statement for redundancy

 

Once you’ve confirmed redundancy pay, provide your employees with a clear written statement that helps them understand what they’re entitled to. Your statement should outline:

 

• How you calculated their redundancy payment

• Their notice period and end date

• Their start date, relevant date for redundancy and how long they’ve worked for the business

• Their pay for redundancy, holiday pay, and any other money owed to them

 

Stay compliant throughout the entire redundancy process

 

Redundancy pay is one of the first things employees worry about when they hear their role may be at risk. Getting the calculations right and explaining them clearly can go a long way in helping people feel informed and supported at a difficult time.

 

If you’re working through a redundancy process for the first time or want to double-check your approach, our Redundancy Toolkit can help. It includes templates, checklists, and step-by-step guidance so you can stay compliant and communicate with confidence. It’s a free online resource, created in partnership with employment law experts at HR consultancy, Clover HR.

 

 

If you’re looking for formal HR or legal support to stay on track during the redundancy process, Clover HR are here to help. You can get in touch with them directly – or explore our Partner Programme directory to find another qualified HR consultant who fits your needs.

 

FAQs about making staff redundant

 

Do employers have to pay redundancy?

 

Yes, in most cases, employers have to pay redundancy. If an employee has at least two years of continuous employment and you’re making staff redundant for a genuine business reason, they’re legally entitled to statutory redundancy pay. Some employers also offer contractual redundancy pay if it’s written into the employment contract or company policy.

 

What happens if my business cannot pay redundancy?

 

If redundancy payments would threaten the survival of your business, you can apply to the Redundancy Payments Service (RPS) for help.

 

• If you’re insolvent, the RPS will pay your employees directly and recover what it can from your assets.

• If you’re not yet insolvent but can’t meet the redundancy bill, you can ask the RPS to step in, but you’ll need to provide financial evidence.

 

Employees can also apply to the RPS themselves if an employer fails to pay what they’re owed.

 

What happens if you get redundancy wrong?

 

If redundancy isn’t well-documented or you don’t keep to a fair process, your employees may bring unfair dismissal claims to an employment tribunal, which can be costly to your business and result in reputational damage. Common pitfalls include:

 

• Choosing who to make redundant without clear or fair reasons

• Failing to consult properly

• Not offering suitable alternative employment when it exists

• Incorrect notice or redundancy pay calculations
  

 

What redundancy protections exist?

 

Some employees have enhanced protection during redundancy. Since 6th April 2024, the Protection from Redundancy (Pregnancy and Family Leave) Act 2023 has expanded redundancy protections for a wider group of employees. Under the updated law: 

 

• Pregnant employees are protected once they notify you of their pregnancy and until 18 months after the birth or expected week of birth, from the point they notify you until 18 months after the birth

• Employees on maternity leave, shared parental leave (over six continuous weeks), or adoption leave, are also protected for 18 months after birth or placement.

 

These employees must be offered suitable alternative employment first, ahead of other employees at risk.

 

• Employees taking neonatal care leave of at least six continuous weeks also get similar redundancy protections.

 

These enhanced protections don't stop you from making redundancies, but instead give these qualifying employees priority for suitable alternative employment roles ahead of others at risk.

 

How does redundancy pay entitlement work for flexible working employees?

 

If your employees work irregular hours or shifts, their redundancy pay entitlement is different. You must work out the average number of hours over the last 12 weeks and use that to calculate their average weekly pay.

 

How does voluntary redundancy work?

 

Voluntary redundancies can feel like an easier option for some employers, as you’re inviting employees to put themselves forward. To encourage volunteers, the redundancy payment you offer is usually higher than the statutory minimum.

You’re not obliged to accept every volunteer; employers can decline if losing a particular employee would create a skills gap.

 

Who isn’t entitled to redundancy pay?

 

You don’t have to pay statutory redundancy pay when:

 

• An employee has less than two years’ continuous service working for the business

• You offer suitable alternative employment, and they refuse without good reason

• Their fixed-term contract ends naturally

• They resign or retire of their own choice

• They’re dismissed for gross misconduct

• They fall into exempt groups such as armed forces, domestic staff working in a private home, or certain Crown servants

 

What’s a good redundancy package?

 

A good redundancy package can help employees feel more supported and protect your employer brand during a difficult period. It usually includes:

 

• Statutory redundancy pay (or more if you offer enhanced redundancy terms)

• Notice pay or pay in lieu of notice

• Payment for untaken holiday

• Extra goodwill payments, outplacement support, or extended benefits (optional)

 

When does statutory notice apply?

 

Statutory notice depends on how long someone has worked for you:

 

• One week’s notice if they’ve worked between one month and two years

• One week for each complete year of service (up to 12 weeks)

 

You must either let them work their notice or pay them in lieu of notice if their contract allows it. Contractual notice may be longer; in those cases, the longer period applies.