Redundancy pay – a summary of the rules

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If an employee has been in the same job for at least two years, their employer has to pay them redundancy pay. We review the main rules below. However, it is possible that the government may amend these in the light of COVID-19 redundancy plans in this autumn’s budget. 

Statutory redundancy pay and contractual redundancy pay 

Statutory redundancy pay is the legal minimum, and no employer can pay less to its staff than this. However, there may be a greater entitlement if the provisions of an employment contract say so. 

For some employees. this could mean a bigger lump sum or getting a pay-out even if they have worked there for less than two years. 

How much redundancy pay will an employee get? 

How much statutory redundancy pay an employee will get depends on: 

  • How long they have been in the job 
  • The age they were in each year that they worked there, and 
  • Their current salary – up to a maximum of £538 per week in 2020/21 (excl N. Ireland) 

There is an overall maximum amount of redundancy pay an employee can get which is capped at £16,140 in 2020/21 even if their actual earnings are higher or their length of service is longer than this. 

Only complete years of service count, and service has to be continuous. 

Here’s what an employee should get in summary: 

Their age Redundancy pay 
Under 22 Half a week’s pay for each year of service 
22 to 40 A week’s pay for each year of service 
Over 41 A week and a half’s pay for each year of service 

Calculating redundancy pay – An example 

Adaku (aged 31) has worked part-time as a hairdresser for her employer for 10 years and two months earning £200 a week. 

Due to COVID-19 her employer has had to make her redundant. 

She gets: 

  • Half a week’s pay for the year she worked when she was under 22 = £100 
  • Nine week’s pay for the nine years she worked aged 22 to 40 = £1,800 

So overall she gets £1,900. 

Pay in lieu of notice and holiday pay 

Pay in lieu of notice (PILON) 

When an employee is made redundant, their employer must give them a statutory minimum of one week’s notice for up to 2 years’ service and one weeks’ notice for each year they have worked for them (up to a maximum of 12 weeks’ notice). The employment contract may mandate a longer notice period. 

All contractual or non-contractual PILON payments are subject to standard income tax and National Insurance deductions. 

This means all basic pay that an employee was deemed to have received is taxed in the same way regardless of whether or not an employee worked during their notice period. 

Termination payments over and above those which are deemed PILONs would still benefit from the £30,000 tax and NIC exemption (see below) 

Holiday pay 

If an employee has any holiday owed, their employer has to either pay them for it or let them take it before they leave. 

All holiday payments are subject to standard income tax and National Insurance deductions. 

£30,000 is tax free 

When an employee is made redundant, they are likely to receive a mix of redundancy pay (which is compensation for their job loss) and other amounts owed to them. 

The first £30,000 of redundancy pay is tax free – regardless of whether an employee gets the legal minimum or a more generous pay-out from their employer. 

They won’t have to pay National Insurance on it either. 

But holiday pay, pay in lieu of notice and any other amounts that are pay for their work rather than compensation for the job loss are taxed as employment. 

Example 1 

Colin receives a redundancy payment of £18,000 plus one month’s pay in lieu of notice, totalling £1,000. 

The redundancy payment is tax free, but Colin’s employer will have to deduct tax and National Insurance contributions from the additional £1,000. 

Example 2 

Kirandeep receives a redundancy lump sum of £32,000. She also gets to keep her company car, which is valued at £8,000. 

The value of the car is added to the redundancy payment, making £40,000. 

Only £30,000 is tax free, so Kirandeep will pay tax on the remaining £10,000 – as she is a higher-rate taxpayer, that will be taxed at a rate of 40%. 

What if an employer is insolvent? 

If an employer goes out of business then an employee will still get statutory redundancy pay and holiday pay owed to the, by claiming these from the State rather than from their employer. 

SRC-Time are one of the South East’s leading accountancy firms in advising businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above. 

Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk or speak with an account manager to get any process started. 

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