Making employees redundant is never a decision that any business owner takes lightly. Beyond the emotional difficulty, there are strict legal rules about how much you must pay and how the process should be handled. Getting the calculations wrong can lead to tribunal claims, and getting the process wrong can turn a genuine redundancy into an unfair dismissal.
This guide sets out exactly how statutory redundancy pay is calculated, who qualifies, the tax rules, and the common mistakes that catch employers out.
Who qualifies for statutory redundancy pay?
To be eligible for statutory redundancy pay, an employee must meet two conditions. First, they must have at least two years' continuous service with you. Second, the reason for their dismissal must be a genuine redundancy, meaning the role itself is disappearing or the need for employees to do that particular kind of work has diminished.
This is an important distinction. Redundancy means the job is going, not the person. If you are unhappy with an employee's performance and use "redundancy" as a way to remove them, that is a sham redundancy and it will not stand up at a tribunal.
Workers on fixed-term contracts that are not renewed due to redundancy are also eligible, provided they meet the service requirement. Agency workers and self-employed contractors are not entitled to statutory redundancy pay.
The statutory redundancy pay formula
Statutory redundancy pay is calculated using a formula based on the employee's age, length of service, and weekly pay. The rates are as follows.
Under 22: Half a week's pay for each complete year of service.
Aged 22 to 40: One week's pay for each complete year of service.
Aged 41 and over: One and a half weeks' pay for each complete year of service.
There are two important caps to be aware of. Weekly pay is capped at £719 (from 6 April 2025). And the maximum length of service that counts is 20 years, even if the employee has been with you longer. This means the maximum possible statutory redundancy payment is £21,570.
The calculation is based on the employee's age at the date of dismissal, working backwards through their service history. So if an employee is currently 43 but was 38 when they started, the years worked when they were under 41 use the lower rate.
Worked examples
These examples use the 2025/26 weekly cap of £719.
Example 1: Employee aged 35, 8 years' service
All eight years fall within the 22-40 age band, so the calculation is straightforward.
8 years x 1 week's pay x £719 = £5,752
Example 2: Employee aged 50, 15 years' service
This employee has worked across two age bands. They started at age 35, so years of service aged 35 to 40 use the one-week rate and years aged 41 to 50 use the one-and-a-half-week rate.
- 6 years at age 35-40: 6 x 1 x £719 = £4,314
- 9 years at age 41-50: 9 x 1.5 x £719 = £9,706.50
Total: £14,020.50
Example 3: Employee aged 25, 3 years' service
All three years fall within the 22-40 band.
3 years x 1 week's pay x £719 = £2,157
Example 4: Employee earning less than the cap
If an employee's actual weekly pay is £450, you use £450 rather than the £719 cap. For example, an employee aged 35 with 8 years' service earning £450 per week:
8 x 1 x £450 = £3,600
The cap only applies where the employee's weekly pay exceeds it.
Tax treatment of redundancy pay
Understanding the tax position helps you communicate clearly with employees and avoid payroll errors.
Statutory redundancy pay is completely tax-free.
Enhanced redundancy pay (anything above the statutory amount) is tax-free up to a combined total of £30,000. This £30,000 threshold includes the statutory redundancy pay, so if the statutory amount is £5,752 and you offer an additional £10,000, the total of £15,752 falls within the exemption and is entirely tax-free.
Payments in lieu of notice (PILON) are taxable as earnings. If your contract includes a PILON clause, the payment is subject to income tax and National Insurance in the normal way. If there is no PILON clause, the position is more complex and you should take advice.
Holiday pay and outstanding wages are taxable as normal earnings.
Enhanced redundancy pay
Many employers choose to pay more than the statutory minimum. This can be a contractual obligation (written into the employment contract or a collective agreement) or a discretionary goodwill gesture.
Common enhancement approaches include using the employee's actual weekly pay instead of the capped rate, applying a multiplier to the statutory formula (for example, double the statutory amount), or offering a flat top-up payment.
If enhanced redundancy is written into the contract, it becomes a legal obligation. You cannot decide to pay only the statutory minimum if the contract promises more. If you are considering introducing an enhanced redundancy scheme, make sure you understand the long-term cost implications before committing it to writing.
The redundancy process
Calculating the payment is only one part of a redundancy situation. You must also follow a fair process, and failure to do so can result in a successful unfair dismissal claim regardless of whether the redundancy itself was genuine.
Establish the business case. You need a genuine reason for the redundancy: the business is closing, the workplace is closing, or the need for employees to carry out particular work has diminished.
Consider alternatives. Before making anyone redundant, explore other options. These might include redeployment to a different role, reduced hours, voluntary redundancy, retraining, or negotiating a settlement agreement for a clean exit by mutual consent. A tribunal will want to see that you genuinely considered alternatives.
Apply fair selection criteria. If you are selecting from a pool of employees doing similar work, use objective criteria such as skills, qualifications, attendance record (excluding disability-related absence), and performance. "Last in, first out" is no longer considered sufficient on its own.
Consult individually. Every employee at risk of redundancy is entitled to individual consultation. You must explain the situation, discuss the selection criteria, consider their suggestions, and explore alternatives. For 20 or more redundancies within 90 days, you must also carry out collective consultation with employee representatives.
Give proper notice. Employees are entitled to their full contractual or statutory notice period (whichever is longer).
Allow time off to look for work. Employees with two or more years' service are entitled to reasonable paid time off to look for new employment or arrange training.
Our redundancy support service guides employers through every stage of this process, from the initial business case through to the final payments.
Common mistakes to avoid
Sham redundancy. Using redundancy as a way to remove a specific person you want out. If you hire someone into the same or a very similar role shortly afterwards, the original redundancy will look suspicious.
Not consulting properly. Consultation must be genuine, not a rubber-stamping exercise. The employee should have a real opportunity to be heard and to suggest alternatives.
Unfair selection criteria. Subjective criteria like "attitude" or "cultural fit" are difficult to defend. Stick to objective, measurable factors.
Ignoring suitable alternative employment. If you have a vacancy that the redundant employee could fill, you must offer it to them. Failing to do so can make the dismissal unfair.
Rushing the process. There is no legal minimum consultation period for individual redundancies (unlike collective redundancies), but rushing through the process suggests the decision was predetermined. Allow reasonable time between consultation meetings.
Forgetting the right to appeal. Employees should be given the right to appeal the redundancy decision. This is not technically a legal requirement for redundancy, but it is best practice and demonstrates fairness.
Planning ahead
If your business is facing changes that could lead to redundancies, whether through restructuring, downsizing, or a TUPE transfer, early planning makes the process smoother for everyone. Review your contracts to check for any enhanced redundancy commitments. Map out your workforce to identify which roles might be affected. Consider whether voluntary redundancy or natural attrition could reduce the need for compulsory redundancies.
We are also building a redundancy pay calculator tool to make these calculations even easier. In the meantime, if you need help working through the numbers or managing a redundancy process, book a free consultation with our team. We help SMEs across the UK handle redundancy situations fairly, legally, and with as little disruption as possible.
