When a business faces restructuring, calculating redundancy pay correctly is a critical step. Get it wrong and you risk not only tribunal claims but also reputational damage at a sensitive time for your business.
This article is designed for HR professionals, in-house legal and finance teams who need clear, board-ready guidance on redundancy payments. You’ll learn who qualifies, how to apply the statutory caps from 6 April 2025, where enhanced contractual terms can create risk, and how redundancy pay interacts with notice, holiday pay and taxation. We also highlight the traps that often trip employers up.
If you need tailored support to scope a compliant process and assess financial exposure, our specialist employment law solicitors can help you manage both the legal and commercial risks of a restructure.
Contents:
- What counts as a redundancy, and who qualifies for statutory redundancy pay?
- The 2025/26 statutory rates and caps
- How to calculate a 'week's pay'
- Statutory vs enhanced (contractual) redundancy pay
- Suitable alternative employment and the 4-week trial
- Notice, PILON and holiday - how these sit alongside redundancy pay
- Collective consultation and when to seek advice
- Common pitfalls that lead to disputes
- If the business cannot pay statutory redundancy now
- Tax snapshot and payroll mechanics
- Forthcoming changes under the Employment Rights Bill: what to expect
- Final word
What counts as a redundancy, and who qualifies for statutory redundancy pay?
Under UK employment law, redundancy occurs when an employer needs to reduce its workforce because a role is no longer required. Common scenarios include business closures, site closures or a diminished need for certain work, or a restructure within the business which means that fewer staff are required.
Only employees (not workers or contractors) are entitled to statutory redundancy pay. They must have at least two years’ continuous service with the employer and be dismissed on grounds of redundancy.
Two years’ service is generally easy to calculate but special rules apply to those employees who are nearing it. If these employees are dismissed with either no notice or short notice, their service for statutory redundancy pay purposes is calculated as if they had been given the statutory minimum notice that they were entitled to. This may mean that they accrue two years’ service and are entitled to a statutory redundancy payment. When planning a redundancy exercise, it’s important to check for any employees who might fall into that category.
Those on lay-off or short-time working for at least four consecutive weeks (or six weeks in 13) may also qualify although their entitlement depends on very specific steps being taken to claim the redundancy payment and terminate their own employment.
| Eligible | Not eligible |
| Employees with 2+ years’ continuous service | Employees with less than 2 years’ service |
| Employees placed on lay-off or short-time working for: – 4+ consecutive weeks, or – 6 weeks within a 13-week period (no more than 3 consecutive) | Workers (eg casual or zero-hours staff without employee status) |
| Employees on fixed-term contracts that have lasted for over two years and which are terminated due to genuine redundancy | Independent contractors or the self-employed |
The 2025/26 statutory rates and caps
For dismissals taking effect on or after 6 April 2025, the statutory cap on a week’s pay is £719, with a maximum statutory redundancy payment of £21,570. For dismissals before that date, the 2024/25 cap of £700 applies, subject to a maximum of £21,000.
The formula to be applied is:
[number of complete years’ service] x [gross weekly wage, subject to the statutory cap] x [0.5 /1 /1.5, depending on age]
The calculation depends on the employee’s age and years of service (capped at 20 years – where there is longer service than that, the earlier years are ignored):
- 0.5 week’s pay for each full year under 22
- 1 week’s pay for each full year aged 22 to 40
- 1.5 week’s pay for each full year aged 41 or over
Redundancy pay in practice (using 2025/26 cap):
- Age 25, 6 years’ service: 6 × 1 week’s pay = £4,314
- Age 38, 12 years’ service: 12 × 1 week’s pay = £8,628
- Age 52, 20 years’ service: (12 years × 1 week) + (8 years × 1.5 weeks) = £19,413
Employers can also direct employees to the GOV.UK redundancy calculator for confirmation.
How to calculate a 'week's pay'
A week’s pay usually means the employee’s normal gross weekly pay before tax. For staff with fixed hours and pay, this is straightforward.
For variable hours or pay, the average pay over the previous 12 weeks is used. Any weeks where no pay was received are excluded and replaced with earlier paid weeks. Guaranteed overtime and contractual commission are included in the calculation; purely discretionary bonuses are not.)
Statutory vs enhanced (contractual) redundancy pay
Some employers offer more generous redundancy packages through contracts, staff handbooks or collective agreements. If so, those enhanced terms must be honoured, and they must not fall below the statutory minimum.
A risk area is “custom and practice.” If you have consistently paid enhanced redundancy in the past, employees may argue that this has become an implied contractual term. It is important to review past practice before setting budgets.
Suitable alternative employment and the 4-week trial
If you offer an employee an alternative role, they may lose their right to a statutory redundancy payment if they unreasonably refuse it. Suitability is judged both objectively (is the role broadly similar?) and subjectively (would refusal be reasonable for this individual?).
If the employee accepts, they are entitled to a 4-week trial period. If either party decides within this time that the role is not suitable, the statutory redundancy entitlement remains.
Notice, PILON and holiday - how these sit alongside redundancy pay
Redundancy pay is separate from other final entitlements:
- Notice pay – employees are entitled to statutory or contractual notice, whichever is longer. Employers may ask them to work this, place them on garden leave, or pay in lieu of notice (PILON).
- Accrued holiday – any untaken statutory holiday must be paid on termination.
- Taxation – redundancy pay up to £30,000 is tax-free. Notice pay and holiday pay are taxable as normal earnings.
Employers should confirm all sums payable in writing and usually pay them in the final payroll. An important point to keep in mind is that an employee is entitled to a written statement from their employer setting out how their redundancy payment has been calculated. A failure to provide that written statement is a criminal offence, which is punishable with a fine. Although the legislation doesn’t specifically say so, it’s likely that this obligation applies to statutory redundancy payments only and not to enhanced payments, although usually the more clarity that an employer can offer on how a final figure was reached, the better.
Collective consultation and when to seek advice
If you propose to make 20 or more redundancies at one establishment within 90 days, collective consultation rules apply. You must:
- Inform and consult employee representatives
- Notify the Insolvency Service via Form HR1
- Begin consultation early enough to be meaningful
- Allow at least 30 days before any dismissal takes effect.
Failure to comply can result in criminal liability and protective awards of up to 90 days’ pay per affected employee. This is in addition to any statutory or enhanced redundancy payments that are payable and also in addition to any awards of compensation for unfair dismissal. Early legal advice is recommended.
Common pitfalls that lead to disputes
Frequent mistakes include:
- Mis-scoping selection pools or applying unfair criteria
- Miscalculating length of service or missing breaks in continuity
- Using the wrong statutory cap for the termination date
- Confusing voluntary redundancy with any other form of redundancy.
- Failing to document calculations clearly
- Mishandling alternative employment trials
Employees have six months from dismissal to bring a claim for a statutory redundancy payment. Employees must undergo ACAS Early Conciliation before any claim can be brought.
If the business cannot pay statutory redundancy now
If an employer is insolvent or unable to pay statutory redundancy payments, employees may claim from the National Insurance Fund through the Redundancy Payments Service (RPS) using Form RP1. Employers must cooperate with the process; failure to do so can result in criminal penalties.
Tax snapshot and payroll mechanics
Key points for payroll teams:
- Redundancy payments up to £30,000 – tax-free
- PILON and holiday pay – taxable
- Payments usually made in the final payroll, though staged agreements are possible
- Provide itemised breakdowns of calculations to reduce disputes
Engage finance and payroll teams early so that planning is done without being rushed and any queries can be properly dealt with.
Forthcoming changes under the Employment Rights Bill: what to expect
The UK Government’s Employment Rights Bill (ERB) is expected to make some significant changes over the next two years. While not all details are final, HR teams and in-house counsel should be aware of the following proposals:
- Collective consultation – The threshold may apply across the whole employer, not just a single site. This could mean more situations trigger collective consultation duties. The maximum protective award for failing to consult may also increase from 90 to 180 days’ pay per affected employee.
- Day-one rights – The current two-year qualifying period for unfair dismissal claims may be scrapped. Instead, employees could have unfair dismissal protection from day one, subject to a new “initial period” where a lighter procedure applies. However, the two years’ service requirement for a statutory redundancy payment is likely to remain.
- Fire and rehire – Dismissal and re-engagement practices are set to be restricted. In most cases, they would be automatically unfair unless the employer is in severe financial distress and follows a statutory Code of Practice.
- Zero-hours and agency workers – Employers may be required to offer contracts that reflect the hours someone actually works, provide reasonable notice of shifts, and avoid last-minute cancellations.
- Statutory sick pay reforms – From April 2026, SSP is expected to become available from day one, with the lower earnings limit removed so more workers qualify.
- Enforcement – A new “Fair Work Agency” will have powers to enforce compliance, including bringing claims on behalf of workers and imposing penalties.
These reforms could expand the pool of employees protected in redundancy situations, increase costs where consultation is required, and raise the risk of claims if processes are not followed carefully.
- Employers planning restructures in 2025–2026 should factor in these potential changes now, particularly if redundancies will run across multiple sites or involve casual staff.
Final word
Redundancies and restructures are always sensitive, and mistakes in redundancy pay calculations can be costly. Our employment law solicitors work with HR leads, finance teams and in-house counsel to design compliant processes, calculate exposure and reduce reputational risk.
