How to Calculate Redundancy Pay Under UK Law

Making someone redundant is one of the most difficult decisions an employer can face. Beyond the conversation itself, 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 redundancy pay under law 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 edge cases that trip most employers up.

Who qualifies for statutory redundancy pay?

Not every employee who leaves during restructuring is entitled to statutory redundancy pay. Two conditions must be met:

1. Two years' continuous employment. They must have worked for you without a break of more than one week for at least two years.
2. Dismissed by reason of redundancy. 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 lasting two or more years also qualify. Contractors and limited-company agency workers are generally not covered — though the employment status tests under IR35 and off-payroll working rules can complicate this.

If an employee has less than two years of service, you have no statutory obligation to pay redundancy. You may choose to offer an enhanced package (many employers do, to soften the blow), but you are not legally required to.

The statutory redundancy pay formula

The calculation has three moving parts: age, length of continuous service, and weekly pay (capped).

For each complete year of service, the employee receives:

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

A maximum of 20 years of service counts, regardless of how long they've actually worked for you.

Weekly pay is capped. The government reviews this annually and publishes it on the gov.uk redundancy pay page. Before you calculate, check the current figure — it changes on specific dates each year. The gov.uk redundancy pay calculator applies the cap automatically, which is handy for a quick check (though you'll still need to verify your interpretation of "week's pay" for variable-hours staff).

Worked example

An employee is 45 years old, has worked for you continuously for 12 years, and earns £580 per week (below the cap).

Breaking down their service:

• Age 33 to 40 (7 years): 7 × £580 = £4,060
• Age 41 to 45 (5 years): 5 × £870 = £4,350

Total: £8,410

If the same employee earned £750 per week, you'd cap the weekly figure at [STAT NEEDED: current weekly pay cap] and recalculate.

What counts as a week's pay?

For fixed-hours, fixed-pay employees, a week's pay is their normal weekly earnings before tax (including regular overtime if it's guaranteed under the contract, but not voluntary or occasional overtime).

For variable-hours employees — shift workers, zero-hours staff, gig-adjacent roles — you calculate the average weekly pay over the 12 weeks before notice was given. Weeks with zero earnings (holiday, sick leave) are excluded; you count back to find 12 weeks with actual income.

Commission and regular bonuses form part of normal remuneration. Discretionary bonuses do not.

This is where many employers slip up. If an employee has had a period on statutory maternity pay, statutory paternity pay, or statutory sick pay, those weeks count — but at the rate they were actually receiving during that period (which may be lower than their normal pay). If you're unsure how to handle this for your specific employee, ACAS provides free guidance.

Tax treatment, notice, and enhanced packages

Tax on redundancy pay

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

Pay in lieu of notice (PILON) is treated differently — because tax rules enjoy making straightforward things complicated. If the contract includes a PILON clause, it's taxable as earnings. Without a clause, HMRC's default since 2018 is that a sum equal to basic pay for the notice period is taxable regardless. Getting this wrong is expensive for both sides — worth professional advice if the total package is complex.

Notice periods

Statutory redundancy pay is separate from notice. An employee 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 12 weeks.

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

Enhanced redundancy packages

Many employers offer more than the statutory minimum: higher weekly pay figures, more generous multipliers per year of service, outplacement support, or extended notice. There's no legal requirement, but it can smooth the process, reduce claims risk, and protect your employer brand. If you offer enhanced terms, document them clearly and apply them consistently to avoid discrimination claims.

Common mistakes employers make

Failing to consult properly. If you're making 20+ employees redundant within 90 days at one establishment, collective consultation rules apply. You must notify the government and consult with employee representatives. Failure = protective award of up to 90 days' pay per affected employee.

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

Ignoring continuity rules. Breaks of one week or less don't break continuity. Neither do maternity leave, sick leave, or secondment. TUPE-transferred employees' previous service counts too.

Not putting it in writing. Always provide a written breakdown of the calculation. This reduces disputes and demonstrates transparency.

Muddling up "week's pay" for variable-hours staff. This one costs employers thousands. Get it wrong, and you're open to an underpayment claim. If your team has irregular hours, spend the time to calculate correctly or use payroll software that handles it automatically.

Calculating redundancy for one person is manageable with a spreadsheet. But when you're restructuring a team, calculations get complex fast — especially with variable pay, TUPE transfers, and enhanced terms. Payroll software can automate calculations, apply the correct caps, generate written statements, and create an audit trail. This is invaluable if a decision is ever challenged. Some platforms also integrate with your final pay and P45 processes, so you're not juggling multiple systems.

Frequently Asked Questions

Q: Does an employee have to accept redundancy pay?

A: Statutory redundancy pay is not optional. It's a legal entitlement if the employee meets the qualifying criteria. You must pay it. An employee can negotiate for enhanced terms if you're offering them, but statutory redundancy is non-negotiable.

Q: What if the employee is close to retirement? Do I have to pay the full amount?

A: Yes. There's no age limit or reduction for older employees. Someone made redundant at 68 with 20 years' service gets the full 20 years × 1.5 weeks' pay (capped weekly pay). The only exception is if they're over the normal retirement age for their job — but that's a narrow exemption and depends on the employment contract.

Q: Can I ask the employee to take the redundancy pay as a lump sum instead of over time?

A: Statutory redundancy pay must be paid as a lump sum. You can't split it into instalments or defer it. Payment should be made by the final pay date or shortly after, unless there's a written agreement otherwise.

Q: What if the employee doesn't take a job offer during the notice period?

A: If you offer suitable alternative employment during their notice period and they unreasonably refuse it, you can reduce the redundancy payment by an amount equal to what they would have earned. But "unreasonably refuse" has a high bar legally — it's not enough that they preferred something else. The role must genuinely be suitable in terms of pay, location, hours, and seniority.

Q: Do I include commission and bonuses in weekly pay?

A: Regular commission and bonuses that form part of normal remuneration, yes. Discretionary bonuses, no. If an employee normally earns a guaranteed quarterly bonus, it counts. If it's "at the discretion of the company," it doesn't. Document your policy clearly to avoid disputes.

Q: What if an employee is on maternity leave when they're made redundant?

A: They're still entitled to full statutory redundancy pay (calculated from their last contractual pay rate before leave began). They're also still entitled to any maternity leave pay they haven't yet received. Their final settlement is potentially complex — involve your payroll or HR advisor.

Q: Can I reduce redundancy pay if the employee finds a new job during their notice period?

A: No. Redundancy pay is separate from notice pay. Even if they land a new role and leave early, the redundancy entitlement doesn't change. Some employers negotiate an agreed early exit instead, but you can't unilaterally reduce it because they found work quickly.

Q: What if I made a mistake calculating the redundancy pay and underpaid the employee?

A: They can bring a claim to an employment tribunal, which can order you to pay the shortfall plus interest. If you overpaid, you cannot recover the excess. Always verify your figures before the final payment goes out. Payroll software with built-in redundancy calculators reduces this risk significantly.

Final thought

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

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