Statutory Redundancy Pay: How to Calculate What You Owe Your Employee
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Statutory redundancy pay is one of the most commonly miscalculated obligations in UK employment law. Get it wrong and you face a dispute, a tribunal claim, or both. This guide explains exactly how the calculation works, with worked examples, so you know precisely what you owe.
Who is entitled to statutory redundancy pay?
An employee is entitled to statutory redundancy pay if they meet all three of the following conditions:
They are an employee (not a worker or self-employed contractor)
They have been continuously employed by you for two or more years
They have been dismissed by reason of redundancy
Employees with less than two years of continuous service have no statutory entitlement to redundancy pay. However, if your company policy or the employment contract provides for enhanced redundancy pay, that may apply regardless of service length.
The statutory redundancy pay formula
The calculation is based on three variables: the employee's age, their length of continuous service, and their weekly pay.
The formula allocates a number of weeks' pay for each complete year of service, weighted by the employee's age during that year of service:
Each complete year of service under age 22: half a week's pay
Each complete year of service between ages 22 and 40: one week's pay
Each complete year of service aged 41 and over: one and a half weeks' pay
Two important caps apply:
Weekly pay cap: £643 per week (as of April 2024, reviewed annually by the government)
Maximum service: Only the most recent 20 years of service count
The maximum statutory redundancy payment possible is therefore: 20 years x 1.5 weeks x £643 = £19,290.
Worked example 1: Straightforward calculation
Employee details:
Age at dismissal: 35
Length of service: 8 complete years
Weekly pay: £500 (below the cap)
Calculation: All 8 years of service fall in the age 22 to 40 band. 8 years x 1 week x £500 = £4,000
Worked example 2: Service spanning age bands
Employee details:
Age at dismissal: 45
Length of service: 12 complete years
Weekly pay: £800 (above the cap, so capped at £643)
Breakdown: The employee turned 41 four years ago, so:
4 complete years of service aged 41 and over: 4 x 1.5 x £643 = £3,858
8 complete years of service aged 22 to 40: 8 x 1.0 x £643 = £5,144
Total: £9,002
Worked example 3: Long service employee
Employee details:
Age at dismissal: 58
Length of service: 25 years (only 20 count)
Weekly pay: £700 (above the cap, so capped at £643)
Breakdown: Only the most recent 20 years count. Working backwards from age 58:
Years aged 41 to 58: 17 years x 1.5 x £643 = £16,396.50
Years aged 38 to 40: 3 years x 1.0 x £643 = £1,929
Total: £18,325.50
What counts as a week's pay?
A week's pay is calculated differently depending on how the employee is paid.
Fixed salary employees: Weekly pay = annual salary divided by 52.
An employee earning £36,400 per year has a weekly pay of £700. Because this exceeds the cap of £643, the capped figure of £643 is used.
Employees with no normal working hours or variable pay: Weekly pay is calculated as the average weekly earnings over the 12 weeks immediately before the calculation date (typically the date notice is given).
Part-time employees: Part-time employees are entitled to the same calculation as full-time employees. Their weekly pay reflects their actual contracted hours and pay.
The weekly pay cap
The weekly pay cap is reviewed by the government every April. The current cap is £643 (from April 2024).
If an employee earns more than £643 per week, the cap applies and their weekly pay for redundancy purposes is £643 regardless of their actual earnings. This means that a highly paid employee receives the same redundancy pay as someone earning exactly £643 per week.
Always check the current cap figure at gov.uk before making a payment. Using an out-of-date figure is a common source of underpayment disputes.
What else must be paid alongside redundancy pay?
Statutory redundancy pay is not the only payment owed when you make someone redundant. You must also pay:
Notice pay The employee is entitled to their contractual notice period, or the statutory minimum if higher, whichever is greater.
Statutory minimum notice periods:
Under 1 month service: no statutory entitlement
1 month to 2 years: 1 week
2 to 12 years: 1 week per complete year of service
12 or more years: 12 weeks
If the employee's contract gives a longer notice period than the statutory minimum, the contractual period applies.
Notice pay can be worked (the employee continues in their role during the notice period) or paid in lieu if the contract includes a payment in lieu of notice (PILON) clause.
Holiday pay Any untaken statutory holiday accrued up to the termination date must be paid. The UK statutory minimum is 28 days per year including bank holidays (or 5.6 weeks). If the employee has taken fewer days than they have accrued in the current leave year, you owe them the difference.
Calculate the daily rate as annual salary divided by 260 (working days in a year) for a full-time employee. Multiply by the number of untaken days.
Outstanding expenses Any legitimate business expenses the employee has submitted and not yet been reimbursed must be paid with the final payment.
Is redundancy pay taxable?
Statutory redundancy pay is tax-free up to £30,000. If the total termination payment (including any enhanced redundancy pay and ex-gratia payments) exceeds £30,000, the excess is subject to income tax.
Notice pay, however, is fully taxable and subject to National Insurance contributions in the normal way, regardless of how it is paid.
If you are unsure about the tax treatment of any element of the termination payment, consult your payroll provider or accountant before making the payment.
Enhanced redundancy pay
Some employers offer redundancy pay above the statutory minimum. This may be set out in:
The employment contract
A staff handbook
A collective agreement with a trade union
Custom and practice (if enhanced pay has been paid consistently enough to become an implied contractual right)
If your business has always paid more than the statutory minimum, check whether this has become an implied contractual obligation before deciding to revert to the statutory amount. Changing an established enhanced redundancy policy without agreement can itself create a legal claim.
Redundancy pay and continuous service
Continuous service is counted in complete years only. A partial year does not count towards the calculation.
Continuous service begins on the employee's start date and ends on the date notice is given (not the last day of employment). Some events can break continuity of service, including certain types of absence or a gap between employments. If you are unsure whether an employee's service has been continuous, take advice before calculating.
When must redundancy pay be paid?
Statutory redundancy pay must be paid on or before the employee's last day of employment. Failure to pay on time can result in the employee making a claim to an employment tribunal.
If you genuinely cannot afford to pay statutory redundancy pay, you can apply to the government's National Insurance Fund to make the payment on your behalf. The employee can then apply directly if you fail to pay. This is a last resort but the mechanism exists to protect employees from insolvent employers.
How to give an employee a written statement of redundancy pay
You must give the employee a written statement showing how their redundancy pay has been calculated. This should show:
Their start date and end date
Their length of service in complete years
The weekly pay figure used (and confirmation if it has been capped)
The calculation breakdown by age band
The total statutory redundancy pay
Any enhanced pay above the statutory amount
Providing a clear calculation statement reduces disputes and demonstrates that the process was handled correctly.
Common mistakes in redundancy pay calculations
Using gross weekly pay without checking the cap Many employers calculate redundancy pay using the employee's actual weekly pay without checking whether it exceeds the statutory cap. Always apply the cap.
Counting incomplete years of service Only complete years count. An employee with 4 years and 11 months of service gets the calculation for 4 years, not 5.
Forgetting about accrued holiday pay This is the most commonly forgotten element. Calculate untaken leave carefully, including any carry-over from the previous leave year if your policy permits it.
Using the wrong weekly pay figure for variable hours workers For employees without fixed hours, the 12-week average calculation must be used. Using a single week's earnings can significantly over or under-estimate the correct figure.
Confusing the calculation date Weekly pay is calculated at the date notice is given, not the last day of employment. For employees on long notice periods, this can make a meaningful difference.
Redundly calculates statutory redundancy pay automatically as part of your complete redundancy process pack. Enter your employee's details and the calculation is done for you, with a full breakdown you can give to your employee. From £149 at redundly.co.uk.