Who Pays Redundancy In The UK?

If you’re facing a downturn, restructuring or a technology shift, you might be looking at redundancies and wondering the big question: who actually pays redundancy in the UK?

In short, employers usually do. But what you must pay, when you must pay it, and the few scenarios where the government may step in are governed by clear rules - and getting them wrong can get expensive fast.

This guide walks you through what redundancy means under UK law, when statutory redundancy pay is due, how it’s calculated, what else you need to budget for (notice, holiday, tax), and practical steps to manage a fair and compliant process from day one.

What Does Redundancy Mean Under UK Law?

Redundancy happens when you dismiss an employee because the role is no longer needed - not because of the individual’s conduct or performance. Typical reasons include closing a location, cutting a function, introducing new systems that reduce headcount, or a general business downturn.

The legal framework sits primarily in the Employment Rights Act 1996 and related regulations. An employee with at least two years’ continuous service who is dismissed by reason of redundancy will normally qualify for statutory redundancy pay, subject to specific rules and exceptions.

Statutory Redundancy Versus Contractual Redundancy

There are two broad types of redundancy pay:

• Statutory redundancy pay - the legal minimum employers must pay to eligible employees.
• Contractual (or “enhanced”) redundancy pay - anything more generous you’ve promised in an Employment Contract, collective agreement or policy. Once promised, it’s legally binding. If you’ve historically paid more than the statutory minimum, consider the risk that a “custom and practice” may have developed.

If you have any discretionary or enhanced terms, make sure you understand your commitment before you announce a process. Our overview of enhanced redundancy pay explains common triggers and pitfalls.

What Counts As Redundancy (And What Doesn’t)?

A genuine redundancy is about the role disappearing or diminishing. If you dismiss someone and simply recruit into the same role immediately afterwards, that’s a red flag. If the reason relates to conduct or capability, that’s not redundancy - different rules apply, as does a different risk profile.

In practice, keep a paper trail of your business rationale, organisational charts before/after, and any financial data that supports the decision. This helps demonstrate a genuine redundancy if a claim arises.

Who Pays Redundancy In The UK?

For a solvent business, the employer pays redundancy. There isn’t a general government fund that covers redundancy for healthy companies. You’ll need to budget and pay eligible employees directly, on or shortly after termination.

Who Is Eligible For Statutory Redundancy Pay?

Eligibility generally requires:

• Employee status (not a self-employed contractor or genuinely casual worker).
• At least two years’ continuous service at the dismissal date.
• Dismissal by reason of redundancy.

Some groups (e.g. certain fixed-term employees where a contract naturally expires without renewal) may fall outside statutory redundancy, but check the facts carefully. If in doubt, seek tailored advice before you act.

How Is Statutory Redundancy Pay Calculated?

Statutory redundancy pay is based on age, length of service (capped) and a statutory cap on “weekly pay”. The core multipliers are:

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

There’s a maximum number of years that count and a weekly pay cap that is reviewed each April by the UK government. Always check the current weekly cap when you’re calculating liabilities, and keep a note of how you arrived at the figure.

Tax Treatment In Brief

As a rule of thumb, the first £30,000 of redundancy termination payments can be free of income tax, but other elements (like notice pay, holiday pay or bonus) are taxed as earnings and normally subject to NICs. The precise tax treatment can be complex, so get payroll advice early and document the breakdown clearly in your letters.

When Does The Government Pay?

Most of the time, it doesn’t. The exception is where the employer is insolvent. If your company goes into formal insolvency and can’t pay redundancy, eligible employees can apply to the Insolvency Service’s Redundancy Payments Service (RPS) for certain statutory sums. More on this below.

Do Companies Have To Pay Redundancy In Every Case?

Not in every case - but if you’re making roles redundant and the employees meet the eligibility criteria, statutory redundancy is normally due. There are some important edge cases:

Small Employers Still Pay

There’s no “small business exemption” from paying redundancy in the UK. Even if you have only a handful of employees, the statutory rules still apply. The main difference for smaller employers is usually around consultation thresholds (collective consultation applies to 20+ redundancies in a 90-day period at one establishment).

Suitable Alternative Employment

If you offer a suitable alternative role on the same or similar terms, and the employee unreasonably refuses it, redundancy pay can be lost. There’s a statutory four-week trial period for alternative roles. Plan role-matching carefully, document offers, and keep records of discussions and reasons for any refusal.

TUPE Transfers

Where staff transfer to another business under TUPE, redundancy pay may not be due from you. If dismissals occur because of a transfer (and not for an “economic, technical or organisational” reason), they can be automatically unfair. The rules here are highly technical - if your restructure overlaps with a TUPE event, get advice before announcing changes. As a related point, changes to terms under TUPE are sensitive; see guidance on TUPE salary reduction for context.

Dismissal For Conduct Or Capability

If you’re ending employment because of misconduct or poor performance, that isn’t redundancy. Follow a fair disciplinary or capability process and be mindful of notice, warnings and any contractual terms. Our checklist for ending an employment contract sets out the main steps from an employer’s perspective.

What Else Must Employers Pay On Redundancy?

Redundancy pay is only one part of your total exit costs. Typically you’ll also need to budget for:

Notice Pay (Or PILON)

You must either require the employee to work their notice or pay them in lieu of notice (PILON), depending on your contract. Statutory minimum notice applies if the contract is silent or less generous. Notice pay is taxed as earnings. Consider whether garden leave is appropriate for confidentiality and client-transition reasons.

Accrued But Untaken Holiday

Any accrued, untaken statutory holiday must be paid on termination, pro-rated to the leaving date and taxed as earnings. Check your contract for any enhanced holiday entitlements and how they’re handled on exit.

Outstanding Wages, Commission, Overtime And Bonuses

Pay anything contractually due up to the termination date. If you have discretionary bonus schemes, make sure the scheme rules are clear on eligibility at termination to avoid disputes. Where commission schemes apply, document the final calculation with care.

Benefits And Deductions

Set out what happens to benefits (e.g. private medical, car allowance) during notice or garden leave. If your contract includes a clawback for things like training fees, ensure the clause is enforceable and reasonable, and apply it consistently.

Settlement Agreements (Optional)

Many employers use a settlement agreement to document terms, prevent future claims and provide a clean break. These are separate to statutory redundancy and need to meet certain formalities to be binding. They’re often used in complex restructures or where you’re offering an enhanced package. Think carefully about confidentiality, non-disparagement and post-termination restrictions.

How To Plan, Budget And Document A Lawful Redundancy

Handled well, redundancy is a structured, legally compliant project with clear paperwork and a respectful process. Here’s how to approach it.

1) Map The Business Case And Structure

• Write down the commercial rationale (e.g. site closure, duplicated roles after a system change).
• Decide which roles are at risk and why. Avoid selecting people; focus on roles.
• Prepare “before and after” organisation charts and a timeline for changes.

This documentation helps you prove a genuine redundancy and underpins fair selection and consultation later on.

2) Check Contracts And Policies

• Review each Employment Contract for notice, PILON, redundancy terms, mobility clauses and bonus rules.
• Check your Staff Handbook for procedures you’ve committed to (consultation steps, selection criteria, appeals).
• Identify any collective agreements or historic practices that might amount to enhanced terms.

3) Choose Fair Selection Criteria

Where multiple employees are in a selection pool, decide fair, objective criteria in advance (e.g. skills, qualifications, performance, attendance - applied carefully to avoid discrimination). Keep evidence of scoring and ensure consistency.

4) Consult Properly

For fewer than 20 proposed redundancies within 90 days at one site, follow an individual consultation process: inform employees their roles are at risk, explain the rationale, share selection criteria, invite representations, and consider alternatives.

If you’re proposing 20 or more, collective consultation rules under the Trade Union and Labour Relations (Consolidation) Act 1992 kick in, with minimum consultation periods and notification to the Secretary of State. Failing to collectively consult can lead to protective awards of up to 90 days’ gross pay per affected employee.

5) Consider Alternatives To Redundancy

Redundancy should be a last resort. Explore options like vacancies elsewhere in the business, reduced hours by agreement, or temporary lay-off/short-time working if your contracts allow. Where you need to vary terms by agreement, follow a careful process - our guide to changing employment contracts covers consultation, consent and risks.

6) Calculate, Budget And Communicate

• Run redundancy calculations using the statutory bands, current weekly pay cap and any enhanced terms.
• Cost notice, holiday, bonuses and any benefits-in-kind during notice or garden leave.
• Sense-check tax treatment before you issue figures.

Present sums clearly in “at risk” and outcome letters. Clarity reduces disputes and builds trust during a difficult time.

7) Use Clear Paperwork

Keep your letters consistent and legally robust: at-risk letters, consultation invites, selection scoring sheets, alternative role offers (with trial period wording), outcome letters, notice letters, PILON confirmation, and (if applicable) a settlement agreement. It’s wise to get Redundancy Advice to tailor documents to your scenario, especially for multi-site restructures or collective consultation.

8) Pay On Time And Process Leavers

Make payments when due and provide itemised breakdowns. Collect company property, switch off systems access, and handle references in line with your policy. A clean, timely process reduces risk of grievances and claims.

When The Employer Can’t Pay: Insolvency And The RPS

If the company is insolvent and genuinely cannot meet redundancy obligations, certain statutory sums may be paid by the Insolvency Service’s Redundancy Payments Service (RPS). This usually requires a formal insolvency procedure (e.g. liquidation, administration).

What Can The RPS Cover?

Eligible employees can apply to the RPS for statutory redundancy pay, unpaid wages, holiday pay and some notice pay (subject to statutory caps). Payments are made from the National Insurance Fund and only up to the statutory limits - not any enhanced contractual terms.

What If We’re Struggling But Not Insolvent?

There is no “hardship” fund for solvent employers. If cash flow is tight, you still need to meet your statutory and contractual obligations or risk unlawful deduction claims and unfair dismissal. Consider staging dates within the rules, bridging finance, or restructuring timelines - and seek early advice from your accountant and lawyer.

Common Mistakes (And How To Avoid Them)

• Confusing redundancy with performance - if the role isn’t disappearing, don’t label it redundancy. Use the correct process for conduct/capability.
• Not consulting - even for small numbers, you must consult individually and consider alternatives. Skipping this invites unfair dismissal claims.
• Using subjective selection criteria - avoid opaque, discriminatory or inconsistent scoring. Keep evidence to back decisions.
• Forgetting holiday and notice - redundancy pay is separate to notice and holiday pay; budget for the whole exit cost.
• Overlooking enhanced promises - check contracts, policies and past practice for any enhanced redundancy commitments.
• Rushing the paperwork - unclear letters or miscalculated figures cause disputes. Get templates reviewed before you start.

Key Documents To Get Right

Your legal foundations matter, not just at redundancy time but from day one. The better your contracts and policies, the smoother your process will be.

• Employment Contract - clear notice, PILON, mobility, bonus and redundancy wording.
• Staff Handbook - consultation steps, selection, appeals, data protection and confidentiality.
• Settlement agreement templates (tailored) - only use where appropriate and properly drafted.
• Redundancy letters suite - at-risk, consultation invites, outcome letters, notice/PILON, alternative employment offers.
• Process checklists - internal controls to make sure you meet statutory timelines and keep consistent records.

If you’re weighing different exit routes, it can also help to map the differences between redundancy and other termination routes. Our primer on severance vs redundancy unpacks the key distinctions for employers.

Key Takeaways

• In most cases, the employer pays redundancy; there’s no general government fund for solvent businesses. Insolvency is the main exception via the RPS, subject to statutory caps.
• Eligible employees with 2+ years’ service are entitled to statutory redundancy pay, calculated by age bands, length of service and a weekly pay cap updated each April.
• Redundancy pay is separate from notice pay, accrued holiday and other contractual sums. Budget for the full exit cost and document the breakdown clearly.
• There’s no small employer exemption from paying redundancy. You must still consult individually, and collective consultation applies at 20+ proposed redundancies in 90 days at one site.
• Check for any enhanced redundancy promises in contracts, policies or established practices - once promised, they are binding.
• Plan the process: define the business case, set fair selection criteria, consult properly, consider suitable alternatives, and issue clear letters. Robust Employment Contracts and a practical Staff Handbook make the process smoother.
• If you’re unsure at any stage, get tailored Redundancy Advice - a small investment up front can prevent costly claims later.

If you’d like help planning redundancies, calculating entitlements or drafting your paperwork, our team can help. Reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.