How Much Redundancy Pay Am I Entitled To?

Redundancy pay is one of the few employment entitlements set out as a formula in statute, which makes it unusually checkable. It is also frequently misunderstood, because the formula has three separate caps and most people only know about one of them.

Who qualifies

You need at least two years of continuous service with the employer to be entitled to statutory redundancy pay. Below that threshold there is no statutory entitlement, though a contract may still provide something.

The redundancy must also be genuine: the job itself has gone, the workplace has closed, or the employer needs fewer people doing work of a particular kind. Being dismissed and replaced is not redundancy, and that distinction matters if you are considering a claim.

The formula

For each full year of continuous service, you receive:

• Half a week’s pay for each year in which you were under 22
• One week’s pay for each year in which you were 22 to 40
• One and a half weeks’ pay for each year in which you were 41 or over

The bands apply to your age during each year of service, not your age when you leave. Someone who worked for an employer from 38 to 45 accumulates a mix of one-week and one-and-a-half-week years.

The three caps

This is where the arithmetic surprises people.

Service is capped at 20 years. Thirty years of service earns the same statutory payment as twenty. Only the most recent twenty count.

Weekly pay is capped at a statutory maximum, revised each April. For anyone earning above that figure, the calculation uses the cap rather than actual pay. This is the cap with the largest effect on higher earners, and the reason statutory redundancy pay is modest even after long service on a good salary.

The total is therefore capped, at 20 years times 1.5 weeks times the weekly maximum. No statutory redundancy payment can exceed that ceiling, whatever the salary or service.

A worked example

Someone aged 45, with 12 years of continuous service, earning above the weekly cap.

• Years worked from age 33 to 40: 8 years at one week each = 8 weeks
• Years worked from age 41 to 45: 4 years at one and a half weeks each = 6 weeks
• Total: 14 weeks, paid at the statutory weekly maximum rather than actual pay

Their actual salary might be double the capped figure, and the payment is calculated on the cap regardless.

What counts as a week’s pay

For someone on fixed hours and fixed pay, it is their normal weekly gross pay before tax. For variable hours or pay, it is the average over the twelve weeks before the redundancy notice.

Overtime counts only if the contract requires the employer to offer it and the employee to work it. Discretionary overtime, however regular in practice, generally does not count, which is a common point of dispute.

What redundancy pay does not include

Several payments often arrive together and are frequently confused with redundancy pay:

• Notice pay. You are entitled to your statutory or contractual notice period, worked or paid in lieu. This is separate and additional.
• Accrued holiday. Untaken leave must be paid. Also separate.
• Outstanding salary, bonus or commission. Owed as normal.

Only the redundancy element benefits from the tax exemption described below.

Tax

The first 30,000 of a genuine redundancy payment is free of income tax and National Insurance. This is one of the more generous exemptions in the tax system and it applies to the redundancy element only.

Payment in lieu of notice, holiday pay and outstanding salary are taxed as ordinary income in full, and they do not consume the 30,000 exemption. If a settlement bundles everything into one figure, the split between elements affects your tax, so it is worth having it itemised.

Contractual and enhanced terms

Many employers, particularly larger ones and those with union agreements, offer enhanced redundancy pay well above the statutory minimum. Common enhancements include using actual weekly pay instead of the capped figure, removing the twenty-year limit, or applying a higher multiplier.

You receive whichever is greater, statutory or contractual. Before accepting any figure, check the employment contract, the staff handbook, any collective agreement, and whether the employer has an established custom of paying more. Custom and practice can create a contractual right even where nothing is written down.

Consultation and process

Employers must consult before making redundancies. Where twenty or more roles are at risk at one establishment, collective consultation rules apply with minimum periods before any dismissal takes effect.

You are also entitled to a fair selection process, reasonable time off to look for work, and consideration for suitable alternative employment within the organisation. A payment calculated correctly does not make an unfair process lawful.

Checking the figure you are offered

Work out the statutory entitlement yourself using the age bands, the capped weekly figure and complete years only. Compare it against any contractual formula. Then check that notice pay and accrued holiday are listed separately rather than absorbed into the total.

If the offer is below the statutory minimum, that is not a negotiating position, it is unlawful. If it is above, the difference is the employer being generous or buying a settlement agreement, and it is reasonable to ask which.