Making employees redundant is one of the most difficult decisions a business owner will face. Beyond the emotional weight of the situation, there are strict legal rules governing both the payments you must make and the process you must follow. Getting the calculations wrong can lead to tribunal claims. Getting the process wrong can turn a genuine redundancy into an unfair dismissal, even when the business case is sound.
This guide covers everything employers need to know: who qualifies for statutory redundancy pay, how to calculate it, the tax rules, and the step-by-step redundancy process that keeps you on the right side of employment law.
Who Qualifies for Statutory Redundancy Pay?
Statutory redundancy pay is governed by Part XI of the Employment Rights Act 1996. To qualify, an employee must meet two conditions.
First, they must have at least two years' continuous service with you. Service is calculated from the first day of employment to the date of dismissal, and must be unbroken. Short gaps (such as a week between contracts) can sometimes still count as continuous service depending on the circumstances.
Second, the reason for their dismissal must be a genuine redundancy. Under the ERA 1996, a redundancy arises when:
- The business is closing entirely.
- The workplace where the employee works is closing.
- The need for employees to carry out work of a particular kind has diminished or ceased.
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 cover to remove them, that is a sham redundancy and it will not withstand scrutiny at a tribunal.
Who Does Not Qualify?
Not every departure counts as redundancy. Employees lose their entitlement to statutory redundancy pay if they:
- Resign before their notice period expires (unless they give counter-notice in the correct way).
- Are dismissed for gross misconduct during the notice period.
- Unreasonably refuse an offer of suitable alternative employment from the same employer.
Workers on fixed-term contracts that are not renewed due to redundancy are eligible, provided they meet the two-year service requirement. Agency workers and genuinely self-employed contractors are not entitled to statutory redundancy pay.
How Statutory Redundancy Pay Is Calculated
Statutory redundancy pay is calculated using a formula based on the employee's age, length of service, and weekly pay. The rates work 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. Weekly pay is capped at £719 (from 6 April 2025). This figure is reviewed annually by the government and typically rises each April. 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 works backwards from the date of dismissal through the employee's service history. If an employee is currently 43 but was 38 when they started, the years worked before they turned 41 use the lower rate.
Worked Examples
These examples all use the 2025/26 weekly pay cap of £719.
Example 1: Employee Aged 35, 8 Years' Service, Earning Above the Cap
This employee earns £850 per week, which exceeds the £719 cap. All eight years fall within the 22 to 40 age band.
8 years x 1 week's pay x £719 = £5,752
Despite earning £850 per week, the statutory calculation uses the capped figure of £719.
Example 2: Employee Aged 50, 15 Years' Service
This employee started at age 35 and has worked across two age bands. Years of service between ages 35 and 40 use the one-week rate. Years from age 41 onwards use the one-and-a-half-week rate.
- 6 years (aged 35 to 40): 6 x 1 x £719 = £4,314
- 9 years (aged 41 to 50): 9 x 1.5 x £719 = £9,706.50
Total: £14,020.50
Example 3: Employee Aged 25, 3 Years' Service
A straightforward calculation. All three years fall within the 22 to 40 band.
3 years x 1 week's pay x £719 = £2,157
Example 4: Employee Earning Below the Cap
If the employee's actual weekly pay is below the cap, you use the actual figure. For an employee aged 35 with 8 years' service earning £450 per week:
8 x 1 x £450 = £3,600
The cap of £719 only applies where the employee's weekly pay exceeds it. For lower-paid workers, the actual weekly pay produces a lower redundancy entitlement.
Enhanced Redundancy Pay
Many employers choose to offer more than the statutory minimum, either as a contractual commitment or a discretionary goodwill gesture. Enhanced packages are common in larger organisations, but SMEs may also offer them to maintain good relationships and reduce the risk of claims.
Common enhancement approaches include:
- Actual weekly pay (uncapped): Using the employee's real weekly pay instead of the £719 cap. For higher earners, this can make a significant difference.
- Multipliers: Applying a multiplier to the statutory formula, such as double the statutory amount.
- Fixed payments: Offering a lump sum on top of the statutory entitlement.
If enhanced redundancy terms are written into the employment contract or a collective agreement, they become a legal obligation. You cannot decide to pay only the statutory minimum if the contract promises more. Before committing enhanced terms to writing, make sure you understand the long-term cost implications.
Tax Treatment
The tax rules for redundancy payments are set out in the Income Tax (Earnings and Pensions) Act 2003, s.401. The key points are:
- Statutory redundancy pay is completely tax-free.
- Enhanced redundancy pay is tax-free up to a combined total of £30,000 (including the statutory amount). If the statutory entitlement is £5,752 and you offer an additional £10,000, the total of £15,752 falls within the exemption and is entirely tax-free.
- Amounts above £30,000 are subject to income tax and employer National Insurance contributions.
- 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 NICs 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 and sit outside the £30,000 exemption.
The Redundancy Process: A Fair Approach
Calculating the payment correctly is only one part of a lawful redundancy. You must also follow a fair process. Failure to do so can result in a successful unfair dismissal claim, even when the redundancy itself is genuine and the payment is correct.
The following steps reflect the approach that tribunals expect to see.
Step 1: Establish the Business Case
Before placing anyone at risk, you need a clear, documented business reason for the redundancies. This could be financial pressures, operational restructuring, a decline in demand for certain services, or changes following a TUPE transfer.
You should also demonstrate that you have considered alternatives to compulsory redundancy before starting the process. Alternatives might include:
- Redeployment to a different role or location.
- Voluntary redundancy.
- A recruitment freeze or natural attrition.
- Reduced hours or temporary lay-offs.
- Retraining employees to fill different roles.
- Negotiating a settlement agreement for a clean exit by mutual consent.
A tribunal will want to see that you genuinely explored these options before deciding that compulsory redundancy was necessary.
Step 2: Define the Selection Pool
Identify the pool of employees whose roles are at risk. The pool should be logical and defensible. It is usually the group of employees doing the same or similar work at the relevant location.
Getting the pool wrong is one of the most common reasons redundancy dismissals are found to be unfair. If you narrow the pool to a single person without good reason, it looks like you have targeted an individual rather than genuinely selecting from a group.
Step 3: Apply Fair Selection Criteria
Once the pool is defined, you need objective and measurable criteria to determine who will be selected for redundancy. Commonly used criteria include:
- Attendance record (excluding absences related to disability, pregnancy, or family leave).
- Performance ratings or appraisal scores.
- Skills, qualifications, and relevant experience.
- Disciplinary record.
- Length of service.
LIFO (last in, first out) is permitted, but it should not be the sole criterion. Relying exclusively on LIFO can amount to indirect age discrimination under the Equality Act 2010, since younger workers tend to have shorter service.
All criteria must be applied consistently across the pool. If you are tracking attendance as part of your selection scoring, make sure the data is accurate and up to date. Our Bradford Factor calculator can help you score absence patterns objectively.
Step 4: Consult With Affected Employees
Consultation is the cornerstone of a fair redundancy process. Individual consultation is required for every redundancy, regardless of how many employees are affected. Each employee at risk must have the opportunity to:
- Understand why their role is at risk.
- See how the selection criteria were applied to them.
- Put forward suggestions or alternatives.
- Ask questions and raise concerns.
If 20 or more employees are to be made redundant within a 90-day period, you also have collective consultation obligations under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). Collective consultation must begin at least 30 days before the first dismissal takes effect (45 days if 100 or more employees are affected).
Consultation must be genuine and meaningful, not a rubber-stamping exercise where the decision has already been made. Tribunals look closely at whether employees' suggestions were genuinely considered.
For a detailed breakdown of the consultation process, including collective consultation requirements, see our guide on the employee consultation process.
Step 5: Consider Suitable Alternative Employment
Before confirming any redundancy, you must check whether there are suitable alternative roles available within the organisation. This is a legal obligation, not just good practice.
If a suitable vacancy exists, you must offer it to the employee before their current role ends. The employee then has a four-week trial period in the new role. If either party decides the role is not suitable during that trial, the employee's redundancy takes effect from the original date.
An unreasonable refusal of a genuine offer of suitable alternative employment means the employee loses their right to statutory redundancy pay. What counts as "reasonable" depends on factors such as the pay, status, location, and working conditions of the new role compared to the old one.
Step 6: Give Notice and Confirm in Writing
Once consultation is complete and the decision is confirmed, you must give the employee their full notice period. Statutory minimum notice under section 86 of the ERA 1996 is:
- 1 week for employees with between 1 month and 2 years' service.
- 1 week per complete year of service for employees with 2 to 12 years' service.
- 12 weeks for employees with 12 or more years' service.
If the employee's contract provides for a longer notice period, you must honour the contractual term.
You should provide written confirmation setting out:
- The reason for the redundancy.
- The redundancy pay calculation and amount.
- The notice period and final day of employment.
- The right to appeal the decision.
- The right to reasonable time off to look for new work or arrange training (section 52, ERA 1996).
Common Employer Mistakes
Even well-intentioned employers can get the process wrong. These are the mistakes we see most often.
Sham redundancy. The role still exists, but it has been given to someone else or a very similar role is advertised shortly after the dismissal. This is the fastest route to a tribunal claim.
Poor or rushed consultation. Consultation must be genuine. Holding a single meeting, handing over a letter, and treating the decision as final is not consultation. Employees should have a real opportunity to be heard and to suggest alternatives.
Unfair selection criteria. Subjective criteria like "attitude" or "cultural fit" are almost impossible to defend at a tribunal. Criteria that appear neutral but disproportionately affect a protected group (for example, part-time workers, who are more likely to be women) can amount to indirect discrimination under the Equality Act 2010.
Failing to consider suitable alternative employment. If you have a vacancy that the redundant employee could fill, you must offer it to them. Overlooking this step can make an otherwise fair redundancy unfair.
Ignoring collective consultation thresholds. If 20 or more redundancies are planned within 90 days and you fail to carry out collective consultation, employees can claim a protective award of up to 90 days' pay each. This can be extremely costly.
Not offering an appeal. While there is no strict legal requirement to offer an appeal in redundancy cases, failing to do so weakens your position significantly if the dismissal is challenged. The ACAS Code of Practice expects a right of appeal for all dismissals.
Making the role redundant but creating a similar new one. Restructuring is legitimate, but if the "new" role is substantially the same as the old one, the redundancy may not be genuine. If roles are changing, consult with affected employees about the new structure and give them the opportunity to apply.
How Rebox HR Can Help
Redundancy is one of the most legally complex areas of employment law. The interplay between fair process, correct payments, consultation obligations, and discrimination law means that even a small misstep can expose your business to tribunal claims.
Our redundancy service supports employers through every stage, from the initial business case and pool definition through to final notification letters and pay calculations. We help you build a process that is legally sound and practically manageable.
If collective consultation is required, our staff consultation service ensures you meet your obligations under TULRCA 1992, including advising on the election of employee representatives and structuring meaningful consultation meetings.
We can help you:
- Draft fair, objective selection criteria and apply them consistently.
- Chair or support individual consultation meetings.
- Prepare all required documentation, including at-risk letters, consultation records, and dismissal confirmations.
- Calculate statutory and enhanced redundancy payments accurately.
- Advise on settlement agreements where a negotiated exit is more appropriate.
For related guidance, see our posts on managing a redundancy process and settlement agreements.
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