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How to calculate your redundancy pay

If your employer makes you redundant, you might be entitled to redundancy pay. Find out how to calculate the payment, whether you're eligible and when you'll be paid.

In this article
What is redundancy pay? How is statutory redundancy pay calculated? Tax on redundancy pay Who is eligible to receive statutory redundancy pay?
Can you lose your right to statutory redundancy pay? When do you receive redundancy pay? What if your employer doesn't pay you? Redundancy pay FAQs

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. This amount is known as 'statutory redundancy pay'. Some employers may pay more than the statutory amount, known as 'contractual redundancy pay'.

 

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.

You'll receive your normal weekly rate, up to a cap of £525 per week. The maximum amount of statutory redundancy pay you can be entitled to overall is £15,750, while the length of service you'll be paid for is capped at 20 years.

Age Redundancy pay per full year's work
18-22 Half a week's pay
22-40 One week's pay
41 and older 1.5 week's pay

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.

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

Contractual 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 the legal minimum. If your employment contracts 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, is tax-free up to a maximum amount of £30,000. Given statutory redundancy pay is capped at £15,750, 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.

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.

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 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 employment contract may still include 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, 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:

  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 is over.
  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 must be of similar pay and require similar skills to your previous role. If you decide to turn it down, you're effectively deciding to leave the company of your own accord, and 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 soon afterwards on a date that they've already agreed with you.

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.
  • Contact Acas: 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 going to a tribunal through early conciliation.
  • Go to a tribunal: If the early conciliation process fails, a tribunal is your last resort. The deadline for claiming redundancy pay your owed is six months minus one day, measured from the last day you were employed. If you are also claiming for unfair dismissal or notice pay, the deadline is three months minus one day.

If your employer is out of business

You can use the government's 'Claim for redundancy and monies owed' service if your employer has gone out of business and 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.

 

What if I'm made redundant while on maternity leave?

 

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.

 

What if I'm made redundant while on sick leave?

 

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

 

Will my overtime hours be included in my redundancy pay?

 

Overtime won't usually be included as part of your weekly pay - the only exception is if the overtime was regular and you had to do it as part of your job.

 

What if I don't have regular working hours?

 

If the amount of hours you work changes each week, and your contract doesn't specify a 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.

 

Will redundancy pay affect my benefits?

 

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.

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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