How to calculate your redundancy pay - Which? (2023)

What is redundancy pay?

If your employer decides to make your job redundant, and you are forced to leave the company, you may be entitled to redundancy pay.

You'll receive your redundancy pay as a lump sum, and up to £30,000 is generally tax-free - so you wouldn't owe any income tax or National Insurance contributions (NICs).

It's mandatory for companies to make a minimum redundancy payment to employees who qualify for it by law (to those employees who have at least two years continuous employment). This amount is known as 'statutory redundancy pay'. Some employers may pay more than the statutory amount, known as 'enhanced redundancy pay'.

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How is statutory redundancy pay calculated?

Your statutory redundancy pay is based on your pre-tax salary, your age and how long you've worked for your employer.

(Video) Calculating Statutory Redundancy Pay

The amount you are entitled to is equal to:

  • One and a half week's pay for each complete year of service in which you were over the age of 41.
  • One week's pay for each complete year of service in which you were aged 22-40
  • Half a week's pay for each complete year of service in which you were under the age of 22.

If you turn 22 or 41 while working for your employer, you'll only receive the higher rates for the full years you've worked while aged over 22 or 41.

You'll receive your normal weekly rate, up to a cap of £571 gross per week.

The maximum amount of statutory redundancy pay you can be entitled to overall is £17,130, while the length of service you'll be paid for is capped at 20 years. These statutory caps are reviewed every year on 6 April.

The government has a step-by-step calculator to show you exactly what you should receive.

Enhanced redundancy pay

Employers can choose to pay more than this legal minimum, or to make the qualifying period shorter than two years service. This may be set out in your employment contract, or agreed to during redundancy negotiations.

However, your employer cannot offer you less than your contractual or statutory entitlement. If your employment contract states a lesser amount, or requires you to waive redundancy pay altogether, your employer will still be required to meet its obligations under the law.

Tax on redundancy pay

£30,000 tax-free allowance

Your total redundancy pay, both statutory and contractual, may be tax-free up to a maximum amount of £30,000. Given statutory redundancy pay is capped at £17,130 you won't pay any tax if you just receive the legal minimum.

Any portion of your redundancy pay above £30,000 is treated as income, and will be taxed at the same rate as your salary and other earnings. Keep in mind this could push you into a higher tax bracket if your salary is close to the threshold.

(Video) How to calculate your statutory redundancy pay | Business Tips

If you're given non-cash benefits as part of your redundancy package - for example, keeping the company car or laptop - the value of these will be added to your redundancy package, and could push you over the £30,000 limit.

Any annual leave you've accrued should be paid out to you, as well as any bonuses you've earned. However, these do not form part of your redundancy package, and will always be taxed as income.

Example of tax on redundancy

Your employer pays you £25,000 as a redundancy payment and allows you to keep the company car, worth £10,000 - this is your redundancy package. You're also owed £3,000 for holiday pay, and a £1,000 bonus.

Your total redundancy package is £35,000, so you'll pay tax on £5,000. The £4,000 in holiday pay and bonus counts as income, and will also be taxed.

  • You can use our Income tax calculator 2022-23 to work out how much tax you'll pay on your total income.

Who is eligible to receive statutory redundancy pay?

The rules for statutory redundancy pay are fairly strict. To qualify, you must:

  • have worked continuously for your employer for at least two years.
  • have lost your job because your employer genuinely needed to make redundancies.
  • have been an employee.

There are many workers who will not qualify for statutory redundancy pay. You won't receive this kind of payout if:

  • you worked in the job for less than two years, you are not an employee, e.g. if you are a casual worker.
  • you are self-employed.
  • you're a police officer or you're in the armed forces.
  • you're a Crown servant, parliamentary staff or holder of public office.
  • you are domestic staff working for your immediate family.
  • you are an employee of a foreign government.

Even if you fall into the categories above, your contract may still include a right to receive a 'redundancy' payment.

Redundancy pay if you're on a fixed-term contract

The two-year rule also counts if you're on a fixed-term contract.

If your employer doesn't renew your fixed-term contract because the job doesn't exist any more, you'll only be eligible for statutory redundancy pay if either:

  • your contract was for two years or more
  • you worked shorter contracts that followed on from each other, i.e. without a break in service, adding up to two years or more.

Can you lose your right to statutory redundancy pay?

Even if you're entitled to redundancy pay, that doesn't mean you'll always receive it.

There are three main reasons why you may lose out on the money when you leave your job:

(Video) REDUNDANCY UK | Tax planning with your redundancy payment...

  1. You leave before the end of your notice period: If you've found another job, for instance, and you choose to leave your current position before the end of the notice period, you will no longer be eligible for a redundancy payout. You're only officially made redundant once the notice period has ended.
  2. You're fired for misconduct before your job finishes: As redundancy won't be the reason you're leaving, you won't receive redundancy pay.
  3. You turn down a suitable alternative job your employer offers: Before making you redundant, employers must attempt to find any 'suitable alternatives' and offer them to you. A suitable alternative will usually be of similar pay and require similar skills to your previous role. If you unreasonably decide to turn it down, you won't be entitled to redundancy pay.

When do you receive redundancy pay?

Your employer should pay your redundancy on the date you leave the company or your next normal pay date.

You should receive the money in the same way you receive your salary - most commonly paid into your bank account.

Additionally, your employer should provide you with a written document explaining how your redundancy payment was calculated.

What if your employer doesn't pay you?

If your employer doesn't pay the amount they should, or pay it in the way they should, there are steps you can take to get the redundancy pay you're entitled to:

  • Write to them: Send a letter to your former employer, telling them what you're entitled to and including evidence that proves this. You must do this within six months of your employment ending
  • Contact Acas to start Early Conciliation: Acas is the Advisory, Conciliation and Arbitration Service, providing free and impartial information to employers and employees about employment law and general workplace relations. Acas will see if your employer will resolve the dispute without you needing to lodge a claim in the employment tribunal. You must start early conciliation within the initial deadline to issue a claim in the Employment Tribunal (see 'Go to a tribunal' below).
  • Go to a tribunal: If the Early Conciliation process fails, a tribunal is your last resort. The deadline for claiming redundancy pay you're owed is usually six months minus one day, measured from the last day you were employed (see below). If you are also claiming for unfair dismissal or notice pay, the deadline to issue those claims is three months minus one day from the date your employment ended.

Generally speaking, you will lose your right to a statutory redundancy payment unless one of the following four events occurs within the six-month period beginning with your last day of employment:

  • The payment is agreed and paid by your employer.
  • You make a written claim for payment to your employer.
  • You lodge a claim for your statutory redundancy payment in an employment tribunal.
  • You present a claim of unfair dismissal to an employment tribunal.

Once you have established your right to claim by way of one of the above, your right to lodge a claim in an employment tribunal is preserved indefinitely (ie. there is no time limit for making a subsequent claim to a tribunal).

If your employer is out of business

You can use the government's 'claim for redundancy and monies owed' service if your employer is insolvent, and hasn't paid the redundancy you're owed.

If your employer has gone out of business, but isn't insolvent, you'll need to make a claim to an employment tribunal.

Redundancy pay FAQs

Check our Q&A below for common questions people have about redundancy payments.

Your redundancy pay will be based on your normal pay, not your maternity pay.

If you have qualified for statutory maternity pay, and are made redundant, you should continue receiving it for 39 weeks, unless you start a new job.

You can find out more information in our guide to maternity and paternity leave.

If you're on sick leave and receiving sick pay, your redundancy pay will be based on your normal pay.

Overtime won't usually be included as part of the calculation of your normal weekly pay - the only exception is if the overtime was guaranteed and compulsory, i.e you had no choice not to do it. Voluntary overtime is not included.

If the number of hours you work varies each week, and your contract doesn't specify the number of 'normal hours', your redundancy pay will be worked out from an average.

The average is based on what you earned in the 12 weeks leading up to being made redundant, and will include any commission you've made.

The 12 week reference period may change depending on whether you were actually working, e.g any weeks you were not working will be discounted and the next normal week will be included instead.

Redundancy payments are treated as capital for means-tested benefits. If your redundancy payment takes your capital over £16,000 and you are under state pension age, then you will no longer be eligible for means-tested benefits.

If your redundancy payment means your capital is taken to between £6,000 and £16,000, any means-tested benefits you receive may be reduced.

This is the case for both statutory and contractual redundancy pay. However, with Jobseeker's Allowance, it's slightly different. The statutory redundancy pay you receive will be deducted from any contractual redundancy payment, and the difference is ignored.

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Any pay you receive in lieu of notice and holiday pay will be treated as earnings for Universal Credit in the assessment period in which they are paid.

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