How Is Redundancy Calculated in the UK?

Restructuring your team is never easy, but sometimes redundancies are the right commercial decision to keep your business sustainable. When you reach that point, getting the calculations right is critical - not just to treat your people fairly, but to stay compliant with UK employment law and avoid disputes later.

In this guide, we’ll walk through how redundancy is calculated in the UK from an employer’s perspective, including statutory redundancy pay, notice, holiday pay, tax, and the common pitfalls that trip employers up. We’ll also cover when “enhanced” redundancy applies, how consultation and selection affect what you owe, and practical steps to document everything properly.

What Counts As A Genuine Redundancy (And Why It Matters)

Before you crunch the numbers, confirm that you’re dealing with a genuine redundancy. Under the Employment Rights Act 1996, redundancy usually applies where the business is closing (in whole or part), the workplace is closing or moving, or the need for employees to do work of a particular kind has diminished.

This matters because if the redundancy isn’t genuine, you risk unfair dismissal claims, which can lead to compensation and legal costs. A fair redundancy process also requires consultation, a reasonable selection pool and criteria, consideration of suitable alternative roles, and fair notice.

If you are closing your business (or a location), remember there are additional obligations around notice, consultation and settlement of final pay. For a broader view of employee entitlements when you wind down, it’s worth reviewing employee rights when a company closes down.

How Is Statutory Redundancy Pay Calculated?

Eligible employees (most employees with at least two years’ continuous service) are entitled to statutory redundancy pay. The formula depends on their age, length of service and weekly pay, subject to statutory caps.

The Statutory Formula (Per Complete Year Of Service)

• 0.5 week’s pay for each full year under age 22
• 1 week’s pay for each full year aged 22 to 40
• 1.5 weeks’ pay for each full year aged 41 or over

Key limits apply:

• Only 20 years of service can be counted.
• Weekly pay is capped at the statutory maximum (revised every April). For the 2024/25 financial year, the cap is £700 per week.

Step-By-Step: Calculating Statutory Redundancy Pay

1. Confirm eligibility: At least two years’ continuous service and not excluded (e.g. some categories of workers, or employees who refuse suitable alternative employment unreasonably).
2. Work out “complete years” of service: Round down to full years, capped at 20.
3. Apply the age multipliers: Split the qualifying years into the bands above based on the employee’s age in each year.
4. Determine the week’s pay: Use “a week’s pay” as defined by law, capped at the statutory maximum. Include regular contractual pay elements; exclude genuinely variable components where the law requires (seek advice for complex pay structures).
5. Multiply and total: Add together the banded years × week’s pay.

Quick Example

Alex is 45 with 10 full years’ service. Weekly pay is £820, but the statutory cap is £700. All 10 years fall in the 41+ band, so multiplier is 1.5 for each year.

Calculation: 10 years × 1.5 × £700 = £10,500 statutory redundancy pay.

Tax Treatment Of Redundancy Pay

• Statutory redundancy pay is generally tax-free up to £30,000 (including any ex-gratia termination sums).
• Contractual payments (e.g. pay in lieu of notice if contractual, accrued holiday, bonuses) are typically subject to tax and National Insurance in the usual way.

Because tax treatment depends on the mix of sums paid, it’s good practice to break down your payment schedule clearly in the termination letter and to obtain payroll input upfront.

Do We Have To Offer Enhanced Redundancy Pay?

Beyond the statutory minimum, you may owe “enhanced” redundancy pay under an employment contract, a collective agreement, a staff handbook, or through custom and practice if a clear, consistent policy has been followed for a long period.

Enhanced arrangements often use the same age/service multipliers but remove or lift the weekly cap, or add extra weeks. If your contracts or policy documents promise more generous terms, you’ll need to calculate both the statutory minimum and the enhanced entitlement and pay the higher amount.

For a deeper look at when employers should top up statutory entitlements, have a read of enhanced redundancy pay. And if you’re putting new terms in place, make sure your Employment Contract and handbook are aligned so expectations are clear from day one.

How To Calculate Notice, PILON And Holiday On Redundancy

Redundancy pay is only part of the picture. Most employees will also be entitled to notice (or pay in lieu), accrued holiday pay, and any other outstanding contractual sums.

Statutory Notice

Unless the contract provides for a longer period, statutory minimum notice is:

• 1 week if employed between 1 month and 2 years
• 1 week per full year of service between 2 and 12 years
• 12 weeks for 12 or more years of service

Many employers like the idea of a “redundancy notice period calculator”. In practice, you apply the simple statutory rules above, then check the contract to see if a longer notice period has been agreed. If the contract says 8 weeks but the statute says 4, the employee gets 8.

Pay In Lieu Of Notice (PILON)

You can either allow the employee to work their notice or end employment immediately and pay PILON. If PILON is contractual, it’s taxable as earnings. If PILON is non-contractual, tax treatment can be more complex - most payments will still fall within taxable earnings since changes to the law a few years ago narrowed the distinction. Either way, the amount is broadly the basic salary the employee would have earned during the notice period.

Holiday Pay

Accrued but untaken statutory holiday must be paid on termination. Calculate the pro-rata leave accrual to the termination date, less leave already taken. Use the employee’s normal rate of pay.

If you’re making any deductions on termination (for example, recovery of season ticket loans or unreturned equipment), ensure there is a clear contractual basis and that you comply with the rules around wage deductions.

Other Sums

• Outstanding overtime or commission: Pay what is contractually due and properly earned.
• Benefits: Check whether benefits continue during notice if worked, and whether any buy-out is needed if you’re paying PILON.
• Bonuses or LTIPs: Review scheme rules carefully for “good leaver” provisions.

Selection, Consultation And How They Impact What You Owe

Calculations depend on eligibility, so your process matters. Key steps include:

Define The Pool And Apply Objective Criteria

Decide on a fair “selection pool” (for example, all employees doing broadly similar work) and apply objective, evidence-based selection criteria (skills, performance, qualifications). Avoid criteria that directly or indirectly discriminate under the Equality Act 2010 - for instance, be careful with length-of-service criteria that could disadvantage younger staff, or any assumption that disadvantages disabled employees.

Consultation And Suitable Alternative Employment

Consultation is required for a fair process, even where only one role is at risk. For collective redundancies (20+ dismissals within 90 days at one establishment), you must collectively consult for a minimum of 30 days (20–99 roles) or 45 days (100+ roles) and notify the Secretary of State (HR1). Failing to consult can lead to protective awards of up to 90 days’ pay per employee.

You also need to consider suitable alternative roles. If a reasonable alternative exists and the employee unreasonably refuses it, they may lose their right to statutory redundancy pay. A 4-week statutory trial period applies for different roles offered as “suitable alternatives.”

Documentation Reduces Disputes

Keep a paper trail: your business case, pool and matrix, consultation notes, and notes on alternative roles explored. Clarity in your process helps prevent grievances and improves your position if a dispute arises. For a wider checklist of fair termination steps, this ending an employment contract guide is a helpful reference.

Redundancy In Wales: Are The Calculations Different?

You might have seen queries like “redundancy calculator Wales”. In reality, redundancy entitlements are set under UK-wide employment law, so the statutory calculation and notice rules are the same in England and Wales (and broadly the same across Great Britain, noting specific nuances for Northern Ireland which has its own system).

Local funding or support programmes may differ by nation (England/Wales/Scotland), but the way you calculate redundancy pay, statutory caps and notice remains consistent under the Employment Rights Act 1996.

Putting It All Together: A Practical Calculation Workflow

Here’s a straightforward workflow you can use across your team to ensure consistency.

1) Check Eligibility And Process

• Is the redundancy genuine? Has the pool and criteria been set objectively?
• Has individual (and if required, collective) consultation started?
• Have you considered suitable alternative employment?

2) Confirm Contractual Position

• Is there an enhanced redundancy policy or contractual entitlement?
• What is the contractual notice period and does PILON apply?
• Are there bonus, commission or benefit terms that affect termination sums?
• Cross-check that your Employment Contract and handbook align.

3) Calculate Statutory Redundancy Pay

• Continuous service (complete years, cap at 20)
• Age-based multipliers per year
• Week’s pay (apply the statutory cap)
• Add up the total and compare it to any enhanced entitlement; pay the higher figure.

4) Add Notice, Holiday And Other Sums

• Notice (worked or PILON)
• Accrued but untaken holiday
• Outstanding contractual sums (commission, overtime, expenses)
• Any lawful deductions (and make sure they’re contractually authorised)

5) Check Tax

• Redundancy/ex-gratia sums within the £30,000 tax-free limit
• Tax/NICs on PILON, holiday, pay for worked notice and other earnings

6) Communicate And Document

• Provide an outcome letter clearly breaking down each component.
• Include the calculation method, payment dates and tax treatment.
• Offer the right to appeal and confirm any support (e.g. time off to look for work).

Common Pitfalls (And How To Avoid Them)

Even well-intentioned employers can make mistakes during redundancy programmes. Watch out for these traps:

• Misclassifying the reason: Using “redundancy” to address performance issues undermines your process. Handle conduct/capability separately and fairly first.
• Skipping consultation: Rushed timelines can lead to inadequate or perfunctory consultation, risking claims and protective awards.
• Unfair selection criteria: Criteria that indirectly discriminate (e.g. penalising disability-related absence) can expose you to discrimination and unfair dismissal claims.
• Ignoring enhanced terms/custom and practice: If you’ve historically paid above statutory rates in a consistent way, staff may expect the same now.
• Incorrect week’s pay: Applying the cap incorrectly or missing regular pay components leads to underpayments.
• PILON/tax errors: Getting the tax/NICs wrong on notice and benefits complicates payroll and can leave you non-compliant.
• Poor documentation: A weak audit trail makes it harder to defend your decisions if challenged.

Being methodical helps you avoid missteps that often feature in tribunal claims. If you want to stress-test your approach, this overview of why employers lose employment tribunals is a useful sense-check.

Severance, Settlement Agreements And When To Offer More

Sometimes you’ll decide to go beyond statutory/enhanced redundancy and agree a settlement (often called “severance”) to resolve all claims and secure confidentiality and post-termination cooperation. It’s common to see employers top up redundancy pay in exchange for a signed settlement agreement, especially where selection was close, timelines are tight, or there’s a higher litigation risk.

From a terminology standpoint, redundancy is a reason for dismissal under statute; “severance” isn’t a legal term itself, but a commercial label for an agreed settlement package. If you’re weighing up options, this comparison of severance vs redundancy sets out the differences and the obligations that still apply.

FAQs For Employers

Does An Employee On Maternity Or Sick Leave Get Redundancy?

Yes, if the role is genuinely redundant and the process is fair. Employees on maternity/adoption/shared parental leave have priority for suitable alternative vacancies. Always take extra care to avoid discriminatory selection or timing.

Can We Offset Redundancy With A Garden Leave Period?

Garden leave affects how and when notice is worked, but it doesn’t replace statutory redundancy pay. You still calculate and pay redundancy pay if the employee is eligible.

Is There A “Redundancy Notice Period Calculator” We Can Use?

You don’t need one. Apply the statutory formula for notice (1 week per year up to 12, with minimums) and compare to the contractual notice. The higher number applies. Then decide whether the notice is worked, on garden leave or paid as PILON.

What If We’re Restructuring Multiple Times In A Year?

Be careful that separate exercises aren’t part of a single “collective” redundancy period for consultation purposes. If 20+ dismissals occur within a 90-day window at one establishment, collective consultation rules may apply.

Should We Use Settlement Agreements For All Redundancies?

Not necessarily. Many employers do for risk management, but they aren’t required by law. If you do, budget for a contribution to the employee’s independent legal advice (often a few hundred pounds to £500+), which is needed for the waiver to be valid.

When To Get Expert Help

If you’re unsure about your pool and criteria, whether enhanced terms apply, or how to structure a settlement package, it’s worth getting tailored support early. A small investment upfront typically saves time, cost and risk later. Our team provides practical Redundancy Advice and can help you with your letters, selection matrix and payment schedules so everything is clear and compliant from day one.

Key Takeaways

• Confirm it’s a genuine redundancy and run a fair process with clear selection, consultation and consideration of suitable alternative roles.
• Calculate statutory redundancy pay using age-based multipliers, capped years (20) and the weekly pay cap set each April, then compare to any enhanced entitlement and pay the higher amount.
• On top of redundancy pay, add notice (worked or PILON), accrued holiday and any other contractual sums; apply the correct tax treatment, including the £30,000 tax-free threshold for redundancy/ex-gratia sums.
• Check contracts, handbooks and custom and practice carefully - enhanced redundancy and contractual notice/PILON terms can materially change what you owe.
• Document your business case, pool and criteria, consultation notes and calculation breakdowns to reduce disputes and strengthen your position if challenged.
• Consider using settlement agreements strategically; if you do, align the package with your risk profile and keep your process fair. Start with this checklist for ending an employment contract fairly.
• If you’re winding down operations or restructuring at scale, sense-check obligations around notice, consultation and final pay against employee rights when a company closes down, and tighten paperwork to avoid the common mistakes explored in why employers lose tribunals.

If you’d like help calculating redundancy packages or running a compliant process, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.