Who Pays Redundancy Pay in the UK? Employers’ Guide

Redundancy is one of those moments in running a business that can feel both commercial and personal.

If you’re facing reduced work, restructuring, or simply need to cut costs, it’s normal to ask the practical question first: who pays redundancy pay in the UK?

In most cases, the answer is straightforward: you (the employer) pay redundancy pay.

But there are important exceptions, procedural steps you need to follow, and cashflow risks to plan for - especially for small businesses where a redundancy payment can be a big hit. This guide breaks it down in plain English so you can make decisions confidently and keep your business legally protected.

What Counts As “Redundancy Pay” (And What You Might Owe)

Before we answer who pays redundancy pay, it helps to be clear on what you’re actually paying.

When employers talk about “redundancy pay”, they’re often mixing a few different payments together. In practice, a redundancy termination can involve:

• Statutory redundancy pay (a legal minimum, if eligibility rules are met)
• Contractual redundancy pay (an enhanced redundancy scheme promised in a contract or policy)
• Notice pay (or pay in lieu of notice if you end employment immediately)
• Accrued but untaken holiday pay
• Any other contractual sums owed (e.g. commission already earned, expenses, bonuses if contractually due)

It’s important not to treat redundancy pay as one single figure. From a legal and payroll perspective, you’ll want to identify each component and ensure you’re paying (and taxing) them correctly. (This article is not tax advice - speak to your accountant or payroll provider for tax treatment in your specific situation.)

Also worth flagging: redundancy should be used when the role is no longer needed (or the business is closing or moving). If the issue is conduct or capability, redundancy is usually the wrong tool - and it can increase your risk if a claim follows. For example, if you’re really dealing with poor performance, you’d normally manage that through a fair process like Performance Improvement Plans rather than redundancy.

So, Who Pays Redundancy Pay In The UK?

In the typical situation, the employer pays redundancy pay.

That means if you employ someone and you make their role redundant, your business is responsible for paying what is owed - including:

• statutory redundancy pay (if the employee qualifies)
• any enhanced redundancy pay you’ve promised contractually
• notice pay and holiday pay

Most of the time, the “who pays redundancy pay” question is really about cashflow. Small businesses often ask:

• Can we spread payments out?
• Can we pay redundancy out of an insurance policy?
• What if the business can’t afford it?

These questions matter, because even if the business is struggling financially, redundancy rights don’t disappear. If redundancy is handled incorrectly, you can end up with additional liability (including unfair dismissal risk, protective awards, or claims for unpaid wages).

And that’s why planning the process early is so important - from day one of thinking about redundancies, it’s worth checking:

• what your contracts say
• what your policies and past practices have been
• what you can realistically afford
• what consultation steps you need to follow

Your starting point is always the employment paperwork you already have in place, like a properly drafted Employment Contract.

When Does The Government Pay Redundancy Instead Of The Employer?

There’s one key scenario where the answer to who pays redundancy pay changes: insolvency.

If your business can’t pay because it has entered a formal insolvency process (for example, liquidation, administration, or similar procedures), eligible employees may be able to claim certain payments from the government (through the National Insurance Fund).

This doesn’t mean redundancy becomes “free” for the business - insolvency has its own serious consequences - but it does matter for employees and for you as an employer trying to handle things responsibly.

What Employees Can Usually Claim If The Employer Is Insolvent

In an insolvency context, eligible employees may be able to claim:

• statutory redundancy pay
• unpaid wages (up to certain limits)
• holiday pay (up to certain limits)
• statutory notice pay (up to certain limits)

However, there are caps and eligibility rules. Also, enhanced/contractual redundancy pay above the statutory minimum is not always covered in the same way - so if you’ve promised an enhanced package, that can create additional complexities.

What If You’re Not Insolvent, But You’re Struggling To Pay?

This is where many small businesses get caught out.

If you’re not formally insolvent, the starting point is still that the employer pays redundancy pay. If you try to avoid liability by calling someone “redundant” but not paying what’s owed, you risk claims for unlawful deduction from wages and unfair dismissal.

If affordability is an issue, it’s often better to explore options like:

• restructuring roles carefully (and consulting properly)
• considering reduced hours or role changes with agreement
• phased redundancies (where commercially sensible)
• settlement discussions (with legal advice) to agree a clean exit

If you are considering an agreed exit, it’s worth understanding the difference between redundancy payments and “extras” you might offer. In practice, employers sometimes offer additional sums to reduce dispute risk - which sits closer to “severance” than strict statutory redundancy. You can sense-check this approach by reviewing Severance Vs Redundancy.

Statutory Redundancy Pay: When Do You Owe It And How Is It Calculated?

Even though the headline question is “who pays redundancy pay”, most employers quickly realise the bigger issue is “how much do we owe, and when?”

Statutory redundancy pay is the legal minimum redundancy payment you may need to make if the employee qualifies.

When Is Statutory Redundancy Pay Typically Due?

An employee will usually need at least two years’ continuous service to qualify for statutory redundancy pay.

That said, even if statutory redundancy pay isn’t owed (for example, service is under two years), you may still owe:

• notice pay
• holiday pay
• other contractual sums

So from an employer’s perspective, don’t assume “no redundancy pay” means “no cost”. There are still termination payments to budget for.

How Is Statutory Redundancy Pay Calculated?

Statutory redundancy pay is generally calculated using a formula based on:

• the employee’s age
• their length of service (capped)
• their weekly pay (capped)

In simple terms, the statutory formula is based on:

• 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 week’s pay for each full year of service aged 41 and over

Length of service is capped at 20 years, weekly pay is capped at the statutory maximum (which changes from time to time), and there is an overall maximum statutory redundancy payment. Because these caps are updated periodically, it’s safest to check the current figures before you calculate.

The key point for small businesses is that statutory redundancy pay is a minimum. If your employment contracts, staff handbook, or redundancy policy promises more generous terms, you may owe more than the statutory amount.

Also be careful about accidental promises. Sometimes an enhanced redundancy entitlement can arise through custom and practice if you’ve consistently paid above statutory levels in previous redundancies. That can turn what you thought was a discretionary goodwill payment into an expectation you need to handle consistently.

Redundancy Pay Vs Notice Pay: Don’t Confuse Them

One of the most common payroll mistakes is blending redundancy pay and notice pay together.

They’re different concepts:

• Redundancy pay compensates eligible employees for losing their job due to redundancy.
• Notice pay is payment for the notice period (either worked, or paid in lieu).

Getting notice wrong can create immediate disputes, so it’s worth checking your statutory and contractual notice obligations and how they interact with redundancy. If you need a refresher, Redundancy Notice Periods is a helpful starting point.

What Process Do You Need To Follow Before You Pay Redundancy?

Even if you understand who pays redundancy pay and you’ve budgeted for it, your legal risk often comes from process, not the payment itself.

Redundancy is a potentially fair reason for dismissal, but you still need to act reasonably and follow a fair procedure. That usually includes consultation and objective selection (where relevant).

Consultation: Why It Matters (Even For Small Teams)

Consultation is not just a “nice to have”. It’s a key part of showing the redundancy dismissal was fair.

Depending on the number of redundancies and the scenario, you may need:

• individual consultation (common in smaller businesses)
• collective consultation (where you propose 20 or more redundancies at one establishment within 90 days)

If collective consultation applies, there are specific legal duties (including consulting appropriate representatives and notifying the Secretary of State). Minimum consultation periods usually apply: at least 30 days before the first dismissal takes effect where 20–99 redundancies are proposed, and at least 45 days where 100+ redundancies are proposed.

Consultation should generally cover:

• why redundancies are proposed
• which roles are at risk
• how selection will work (if selecting from a pool)
• alternatives to redundancy (redeployment, reduced hours, etc.)
• timelines and next steps

If you’re unsure what the consultation timeline should look like, it’s worth getting clear on redundancy consultation periods early, because timing mistakes can be costly.

Selection Pools And Scoring

If you’re making one person redundant from a team where multiple people do similar work, you’ll usually need to consider:

• who is in the “selection pool”
• what scoring criteria you will use
• how you will evidence that the criteria were applied fairly

A scoring matrix can be useful, but it needs to be designed carefully to avoid discrimination risk or “box-ticking”. Keep written records of your rationale - it will help if decisions are challenged later.

Suitable Alternative Employment

As part of a fair redundancy process, you should consider whether there is suitable alternative employment available in your business (or associated entities, where applicable).

This can be a tricky area because what is “suitable” depends on factors like:

• pay and hours
• location
• required skills
• seniority and responsibilities

There isn’t a one-size-fits-all answer, but the key is that you consider options genuinely and document what you explored.

How Can You Reduce Risk When Handling Redundancy Pay?

Redundancy is often where small business owners want to “do the right thing” while also protecting the business from disputes.

Here are practical ways to reduce legal and commercial risk while staying fair.

1. Be Clear On What You’re Paying (And Why)

Spell out in writing the breakdown of:

• statutory redundancy pay
• enhanced redundancy pay (if offered)
• notice pay / PILON
• holiday pay
• any other sums

This avoids misunderstandings and makes it easier for your employee to see you’ve paid correctly.

Also be aware that different termination payments can be treated differently for tax and National Insurance (for example, holiday pay and notice pay are usually treated as earnings). This article is not tax advice - your payroll provider or accountant can confirm the correct treatment.

2. Consider A Settlement Agreement For Clean Exits (Where Appropriate)

Sometimes a redundancy is high-risk (for example, there’s disagreement about selection, or the employee is raising complaints). In those situations, employers may consider a settlement agreement to achieve a clean break.

Settlement agreements are a specialist area, and the right approach depends on your situation, but it’s often helpful to benchmark what employers commonly offer in practice. You can sense-check expectations using Average Settlement Agreement Amount.

3. Keep Your Documents And Communications Consistent

Even in a small business, your redundancy communications should be consistent and professional. This typically includes:

• meeting invites
• consultation notes
• selection scoring (if applicable)
• outcome letters
• final payment calculations

Having the right internal documents and templates helps you move quickly without cutting corners - which is important when you’re already under commercial pressure.

4. Don’t Try To “Rebrand” Another Dismissal As Redundancy

It can be tempting to use redundancy as a “simpler” way to exit someone, but it often backfires.

If the real issue is misconduct, you should usually follow a disciplinary process instead - and that means having solid steps, clear documentation, and a fair approach. If you’re dealing with serious issues, a checklist like Gross Misconduct can be a helpful reference point for the right kind of process (even if you ultimately decide a different route is appropriate).

Key Takeaways

• In most situations, redundancy pay is paid by the employer, including statutory redundancy pay (if eligible), notice pay, holiday pay, and any contractual amounts owed.
• The main exception is where the employer is insolvent - in that case, employees may be able to claim certain payments from the government (subject to eligibility rules and caps).
• Redundancy terminations often involve multiple payment components, so you should break down the figures clearly (redundancy pay vs notice pay vs holiday pay).
• Statutory redundancy pay usually requires two years’ service and is subject to key caps (including a 20-year service cap and a weekly pay cap that changes from time to time).
• A fair redundancy process matters just as much as paying the right amount, including consultation, selection (where relevant), and considering suitable alternative employment.
• Collective consultation rules can apply if you propose 20 or more redundancies at one establishment within 90 days, with minimum consultation periods of 30–45 days depending on numbers.
• If you want to reduce dispute risk, consistent documentation and (where appropriate) a properly handled settlement agreement can help you reach a clean exit.
• Redundancy isn’t a substitute for performance or misconduct management - using the wrong process can increase your legal exposure.

If you’d like help working out what you need to pay, running a fair redundancy process, or drafting the right documents, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.