UK Redundancy Pay 2026: Calculated, Rates & Eligibility

Redundancy pay sits at the centre of redundancy risk. If you underpay, pay late or misunderstand who qualifies, you can trigger tribunal claims, HMRC issues and wider challenges to the fairness of the redundancy process. The legal rules are prescriptive, but the practical risks for employers come from how redundancy pay interacts with selection decisions, consultation, suitable alternative work, notice pay and settlement negotiations.

Redundancy pay is also one of the first things employees focus on, particularly where a restructure creates uncertainty or anxiety. A clear, documented approach to eligibility and calculations helps reduce disputes, supports meaningful consultation and keeps the organisation on solid ground if decisions are later challenged.

What this article is about
This employer guide explains UK redundancy pay rules in a compliance-first way. It covers when redundancy pay is triggered, who is eligible, how statutory redundancy pay is calculated, how a week’s pay is worked out, tax and National Insurance treatment, the link between redundancy pay and notice or PILON, the collective consultation duties that often sit alongside redundancy pay decisions, the insolvency position through the Redundancy Payments Service and how settlement agreements fit into redundancy exits. Each section highlights the risk points that most commonly lead to disputes or tribunal claims.

Section A: Redundancy pay fundamentals for employers

Employers often treat redundancy pay as the final step in a redundancy process, but legally it is the opposite: redundancy pay entitlement depends on the underlying reason for dismissal, the employee’s status and service, the timing of termination and, in some cases, the steps you take during consultation, redeployment and notice. This section sets the foundation by defining redundancy pay, when it is triggered and what it does and does not cover.

1. What redundancy pay is in UK employment law

Redundancy pay is compensation payable to eligible employees whose employment is terminated by reason of redundancy. In practical terms, “redundancy pay” usually means statutory redundancy pay, although employers may also operate an enhanced redundancy scheme by contract, collective agreement or policy. Where your documentation governs pay outcomes, ensure it aligns with the employee’s employment contract and any redundancy policy, and apply terms consistently to reduce dispute and discrimination risk.

Statutory redundancy pay is not a discretionary goodwill payment. It is a statutory right for qualifying employees, and where it is due, failure to pay (or underpaying) can be enforced through an employment tribunal claim. That statutory framework is distinct from, and sits alongside, other termination payments such as unpaid wages, accrued but untaken holiday pay and notice pay.

From a risk-management perspective, redundancy pay is also a credibility test. If you can demonstrate that eligibility was assessed correctly and the calculation was transparent, you are less likely to see disputes escalate during redundancy consultation and more likely to contain the legal and reputational fall-out of a restructure.

2. When redundancy pay is triggered

Redundancy pay is only triggered where the dismissal is genuinely “by reason of redundancy”. In UK law, redundancy has a specific meaning. Broadly, it covers business closure, workplace closure or a reduced requirement for employees to do work of a particular kind. In an employer guide, the compliance point is straightforward: you do not reach redundancy pay until you have established a genuine redundancy situation and you have identified whose roles are at risk because of that reduced requirement. For a fuller overview of redundancy decision-making and process design, see redundancy guidance.

This matters because redundancy is not a lawful substitute for performance management, personality conflicts or conduct concerns. If the real reason for dismissal is not redundancy, paying redundancy pay does not make the dismissal fair. In that scenario, the organisation may be paying redundancy sums while still facing claims for unfair dismissal and, depending on the facts, automatically unfair dismissal. Employers should also ensure selection and scoring do not create indirect discrimination risk, for example in relation to age discrimination or disability discrimination.

Redundancy pay becomes payable only if the employee qualifies. The most common eligibility threshold is two years’ continuous service, but there are further disqualifying factors, including circumstances where suitable alternative employment is offered and refused without good reason.

3. What redundancy pay does not cover

A common operational mistake is treating redundancy pay as the “full and final” payment due on termination. It is not. Redundancy pay is separate from contractual and statutory sums that must also be dealt with at termination.

In most redundancy exits, employees will also be entitled to salary up to termination date and accrued holiday pay. They may also have contractual entitlements that need careful handling, such as commission arrangements, bonuses linked to a measurement period, expenses owed, or benefits provisions. Employers should avoid rolling multiple sums together without a breakdown, because it increases the likelihood of dispute and can create tax treatment issues, especially where notice pay is paid in lieu.

Redundancy pay also interacts with notice. Statutory or contractual notice may be worked, or it may be paid in lieu. If notice is paid in lieu, employers should ensure the contractual basis is clear and that payments are itemised, particularly where a payment in lieu of notice (PILON) arrangement is used. Notice compliance should be assessed against the applicable statutory notice period and any contractual enhancement.

A separate but important boundary is that redundancy pay does not, by itself, prevent claims. Even where redundancy pay is correctly paid, an employee can still claim unfair dismissal if the redundancy procedure was unfair, if selection criteria were discriminatory, if consultation was defective, or if suitable alternative roles were not properly considered.

4. The employer’s responsibility for paying redundancy pay

Where an employer remains solvent, the employer is responsible for paying statutory redundancy pay to eligible employees. Payment should be made promptly and in line with agreed termination arrangements. Employers should also provide a clear written explanation of how the redundancy payment has been calculated, including the employee’s relevant length of service used for calculation purposes, the week’s pay figure applied (and whether a statutory cap was used), the age band calculation applied across the employee’s service history, the total redundancy payment due and when and how it will be paid.

This level of transparency is not just good HR practice. It reduces the risk of later disputes and supports the employer’s position if an employee alleges underpayment or procedural unfairness.

Where an employer is insolvent, the mechanism changes. Statutory payments may be met through the Redundancy Payments Service, but insolvency does not eliminate the underlying statutory entitlements. Insolvency also does not automatically remove consultation obligations. Where collective obligations are engaged, employers should still plan around collective consultation duties and assess whether any limited “special circumstances” arguments are relevant, noting this is a narrow defence and does not remove the duty to consult.

If you are restructuring in a way that affects employment terms or headcount planning, ensure redundancy pay governance aligns with wider contractual controls and communications, including the approach to changing employment contracts where relevant. Where disputes arise over deductions or promised benefits, employers can also face claims framed as breach of employment contract.

Section summary
Redundancy pay is a statutory entitlement for qualifying employees dismissed by reason of redundancy, but it sits within a wider compliance framework. Employers should treat redundancy pay as part of the legal architecture of redundancy decisions, not as an administrative afterthought. Clear eligibility assessment, transparent calculations and accurate separation of redundancy pay from other termination sums reduces disputes, supports consultation and limits tribunal and HMRC risk.

Section B: Who is eligible for redundancy pay?

Redundancy pay disputes most often arise not from the arithmetic, but from arguments about eligibility. Employers must assess eligibility carefully before confirming redundancy pay entitlement, particularly in restructures affecting mixed workforces, variable hours staff, TUPE transfers or employees close to the two-year service threshold. This section explains who qualifies, how continuous service is calculated and when entitlement can be lost.

1. The two-year continuous service requirement

To qualify for statutory redundancy pay, an employee must have at least two years’ continuous employment as at the “relevant date”. In most redundancy cases, the relevant date is the date on which notice expires. Where statutory minimum notice is not given, statutory notice may need to be added when assessing whether the two-year threshold is met, provided the employee is not being dismissed for gross misconduct. This point matters in borderline cases and should be checked before communicating eligibility outcomes.

This distinction is critical. Employers sometimes calculate service up to the date notice is given, rather than when notice ends. If that error takes an employee below the two-year threshold, the organisation risks a successful tribunal claim for unpaid redundancy pay.

Continuous service is not broken by ordinary absences. Periods of annual leave, sickness absence, maternity leave, paternity leave, adoption leave and other statutory family leave all count towards service. Temporary lay-off or short-time working will also usually preserve continuity.

Where a business transfer occurs under the Transfer of Undertakings (Protection of Employment) Regulations 2006, continuity of employment transfers with the employee. The new employer must therefore take pre-transfer service into account when calculating redundancy pay. For practical guidance on how continuity applies in transfers and reorganisations, see TUPE.

Service used for calculating the amount of redundancy pay is capped at 20 years. However, this cap does not affect the eligibility threshold. An employee with more than two years’ service qualifies; the 20-year limit applies only when calculating the payment.

From a compliance perspective, employers should audit service dates early in any redundancy process. Borderline cases, including those just under two years’ service, should be checked against statutory notice rules to avoid underpayment. Where notice is relevant, employers should ensure it aligns with the applicable redundancy notice period rules and any contractual enhancement.

2. Employee status and who does not qualify

Only employees are entitled to statutory redundancy pay. Workers, independent contractors and genuinely self-employed individuals do not qualify.

The legal distinction between employee and worker can be complex. An employee works under a contract of employment and benefits from the full suite of statutory employment rights, including redundancy pay. A worker provides personal service but may not have guaranteed hours or mutuality of obligation.

Misclassification creates risk. If an individual has been labelled a contractor but, in reality, meets the legal test for employee status, they may be entitled to redundancy pay as well as other employment rights. In large-scale restructures involving consultants, casual staff or zero-hours arrangements, status should be reviewed carefully before excluding individuals from redundancy calculations.

Part-time employees are fully entitled to redundancy pay and must not be treated less favourably than comparable full-time employees. The calculation is based on their actual week’s pay, subject to statutory caps. Any enhanced redundancy scheme must also comply with equality and discrimination law.

3. Dismissal must be by reason of redundancy

Even where service and status are satisfied, redundancy pay is only due if the dismissal is genuinely for redundancy. If the dismissal is actually for conduct, capability or another substantial reason, statutory redundancy pay is not triggered.

In practice, employers sometimes blend performance concerns with structural change. This creates risk. If the employee’s role genuinely disappears because of a reduced requirement for work of that kind, redundancy pay may be due. If the role continues but the employer prefers another individual, redundancy may not be the true reason.

Tribunals will examine the real reason for dismissal. Paying redundancy pay will not automatically shield the employer from challenge if the factual basis for redundancy is weak. Where there is a credible risk that procedure or selection is challenged, employers should ensure their approach remains aligned with fair dismissal principles to reduce exposure to unfair dismissal claims.

4. When redundancy pay can be lost

There are specific circumstances in which an otherwise eligible employee may lose the right to redundancy pay.

Gross misconduct dismissal is one such example. If an employee is fairly dismissed for gross misconduct before the redundancy takes effect, statutory redundancy pay will not be due. However, employers should be cautious where gross misconduct is relied on during a redundancy programme, because if the dismissal is later found unfair, redundancy pay may still become payable, alongside other compensation. See gross misconduct dismissal for practical risk considerations.

Another key area is suitable alternative employment. Where an employer makes an offer of suitable alternative work before the existing contract ends, and the employee unreasonably refuses that offer, redundancy pay may be lost. Whether refusal is reasonable depends on factors such as pay, status, location, hours, job content and the employee’s personal circumstances. For a detailed employer guide to assessing suitability and handling refusals, see suitable alternative employment.

If an employee accepts an alternative role, they are entitled to a statutory four-week trial period. If the new role proves unsuitable during that trial and the employee rejects it for good reason, redundancy pay entitlement is preserved. If the employee unreasonably rejects suitable work, entitlement can be forfeited.

Employers must handle this area with care. A premature decision that refusal was unreasonable can lead to both unpaid redundancy claims and unfair dismissal arguments.

Employees who resign voluntarily before the redundancy dismissal takes effect may also lose entitlement, depending on the circumstances. Each case requires analysis of timing and contractual arrangements.

5. Special protection and discrimination risk

Although redundancy pay eligibility itself is linked to service and status, employers must remain alert to discrimination and automatically unfair dismissal risks within the wider redundancy process.

Certain employees have priority rights to be offered suitable alternative vacancies where they exist. In particular, priority protection applies to employees on maternity leave and, following 2024 amendments, may also extend to employees who are pregnant (once the employer has been informed) and certain employees returning from family leave. Failure to comply can render dismissals automatically unfair and discriminatory, irrespective of redundancy pay calculations. Employers managing these risks should also be mindful of related exposures such as pregnancy discrimination and, depending on the circumstances, disability-related issues including disability discrimination.

Similarly, dismissals connected to pregnancy, whistleblowing, trade union membership or other protected characteristics may be automatically unfair. In such cases, redundancy pay may still be due if service thresholds are met, but liability can extend far beyond the redundancy payment.

Section summary
Eligibility for redundancy pay depends on employee status, at least two years’ continuous service and a genuine redundancy dismissal. Continuity rules, statutory notice additions and TUPE transfers frequently affect calculations at the margins. Entitlement can be lost in cases of gross misconduct or unreasonable refusal of suitable alternative employment. Employers who assess eligibility carefully at an early stage reduce the risk of underpayment claims and associated unfair dismissal exposure.

Section C: How to calculate statutory redundancy pay

Redundancy pay errors most often arise at the calculation stage. Even where eligibility has been correctly established, misapplying age bands, using the wrong week’s pay figure or misunderstanding statutory caps can result in underpayment claims. This section explains how statutory redundancy pay is calculated, how a week’s pay is defined and where employers most commonly go wrong.

1. The statutory redundancy pay formula

Statutory redundancy pay is calculated using a fixed legislative formula based on three factors:

• the employee’s age during each year of service
• their length of continuous service, capped at 20 years
• their gross weekly pay, subject to a statutory maximum

The formula provides:

• 0.5 week’s pay for each full year of service in which the employee was under 22
• 1 week’s pay for each full year of service aged 22 to 40 inclusive
• 1.5 weeks’ pay for each full year of service aged 41 or over

Only full years of service count. Partial years are disregarded.

The weekly pay figure is subject to a statutory cap, which is reviewed annually each April. For the 2024/25 tax year, the statutory cap is £700 per week. Length of service is capped at 20 years for calculation purposes. On that basis, the current maximum statutory redundancy payment is £21,000.

Employers must check the applicable cap at the time the redundancy takes effect, not when consultation begins. Using an outdated cap is a common and avoidable error.

2. How a “week’s pay” is calculated

The definition of a week’s pay is set out in the Employment Rights Act 1996 and varies depending on how the employee is paid and whether they have normal working hours.

Where an employee has normal working hours and a fixed salary, a week’s pay is generally their normal gross weekly pay, subject to the statutory cap.

Where pay varies, or where the employee has no normal working hours, the calculation usually requires averaging pay over a statutory reference period. In most cases, this involves calculating the average weekly remuneration over the 12 weeks preceding the calculation date, ignoring weeks in which no remuneration was payable and substituting earlier weeks if necessary.

The calculation date is normally the relevant date for redundancy purposes, typically when notice expires. Where employment ends without notice, the calculation date is usually the termination date. Confusing the date notice is given with the relevant date can produce inaccurate figures.

Certain payments may be included if they form part of normal remuneration, such as guaranteed overtime. Purely discretionary bonuses are less likely to form part of a week’s pay, although contractual wording should be reviewed carefully.

From a governance perspective, employers should document:

• the basis on which the week’s pay figure was derived
• whether the statutory cap has been applied
• the calculation of service years by age band

This documentation provides a defensible audit trail if challenged.

3. Service cap and maximum payment

Although eligibility requires only two years’ service, the amount payable is limited to a maximum of 20 years’ service. Any service beyond 20 years does not increase the statutory payment.

The statutory weekly pay cap also limits the overall award. High earners may expect redundancy pay to reflect actual salary levels, but statutory redundancy pay is restricted to the capped weekly amount.

Where the employment contract or company policy provides for enhanced redundancy pay, the employer must comply with those enhanced terms. However, contractual enhancement cannot result in payment below the statutory minimum.

Enhanced schemes must also be applied consistently. Inconsistent application can give rise to discrimination claims, breach of contract claims or equal treatment disputes.

4. Using the statutory redundancy pay calculator

The government provides an online statutory redundancy pay calculator which can be used as a cross-check. It allows employers to input:

• date of birth
• start date
• end date
• weekly pay

The calculator then applies the statutory age bands and caps automatically.

However, reliance on the calculator does not remove employer responsibility. Employers remain legally accountable for ensuring that service dates, weekly pay figures and termination dates have been correctly entered.

In large-scale restructures, payroll teams should work alongside HR and legal advisers to ensure consistency across affected employees.

5. Common calculation risk areas

Tribunal claims relating to redundancy pay frequently arise from:

• miscalculating the relevant date
• failing to add statutory notice when required
• misapplying age bands
• using incorrect weekly pay figures
• failing to apply the updated statutory cap
• excluding employees incorrectly at the two-year threshold

In some cases, redundancy pay disputes are accompanied by unfair dismissal or discrimination claims, significantly increasing financial exposure.

Employers should therefore treat redundancy pay calculations as part of a structured termination process, not as an administrative afterthought completed on the final payroll run.

Section summary
Statutory redundancy pay is calculated using a fixed formula based on age, length of service and capped weekly pay. Only full years of service count, service is capped at 20 years and weekly pay is subject to an annual statutory limit. Accurate identification of the relevant date and careful calculation of a week’s pay are essential to avoid underpayment claims and associated tribunal risk.

Section D: Redundancy pay, tax treatment and notice pay interaction

Redundancy pay does not sit in isolation from tax law. Employers must distinguish carefully between statutory redundancy pay, contractual or enhanced redundancy payments and notice pay. Errors in classification can lead to HMRC liability, incorrect payroll deductions and disputes with departing employees. This section explains how redundancy pay is taxed and how it interacts with notice and payment in lieu of notice (PILON).

1. Is redundancy pay tax-free?

Statutory redundancy pay forms part of a broader category known as termination payments.

Under current UK tax rules:

• The first £30,000 of qualifying termination payments is free of income tax.
• Any amount above £30,000 is subject to income tax.
• Employer Class 1A National Insurance contributions are payable on amounts above £30,000.
• Employee National Insurance contributions are generally not payable on genuine redundancy compensation.

The £30,000 threshold applies to the total of qualifying termination payments, not just statutory redundancy pay. This means that enhanced redundancy payments, ex gratia sums and certain compensation payments must be aggregated when assessing the threshold.

Employers should ensure payroll teams apply the correct tax treatment at source. Incorrect treatment can result in HMRC compliance action and, in some cases, financial exposure for the employer if tax is not properly accounted for.

2. The critical distinction: redundancy pay vs notice pay

A key compliance risk area is the treatment of notice pay.

Since April 2018, the rules require employers to treat basic pay that an employee would have earned during their notice period as earnings, even if the contract is terminated immediately and payment is made in lieu of notice. This amount is often referred to as post-employment notice pay (PENP).

The practical consequences are:

• Basic pay for unworked statutory or contractual notice must be taxed as earnings.
• It does not fall within the £30,000 tax-free termination payment exemption.
• Employee and employer National Insurance contributions will apply in the usual way.

This applies whether or not the contract contains an express PILON clause.

Employers must therefore separate:

• statutory or enhanced redundancy pay
• genuine ex gratia compensation
• notice pay, including any post-employment notice pay calculation

Blending these sums into a single “termination payment” without breakdown creates tax and legal risk. Where notice arrangements are unclear, employers should review the contract and the practical operation of payment in lieu of notice (PILON) provisions to ensure compliance.

3. Enhanced redundancy payments and tax

Where employers operate enhanced redundancy schemes, the enhanced portion is generally treated as part of the termination payment regime. Provided the payment is compensation for loss of employment and not earnings, it may fall within the £30,000 tax-free threshold.

However, care is needed. If a payment is contractual and arises automatically on termination, HMRC may scrutinise whether it should be treated as earnings. The drafting of contractual redundancy schemes and settlement agreements therefore matters.

Employers offering enhanced packages during collective redundancies should model the tax impact in advance to avoid last-minute recalculations that undermine employee trust.

4. Redundancy pay and settlement agreements

Settlement agreements often bundle together:

• statutory redundancy pay
• enhanced redundancy sums
• notice pay
• compensation for potential claims

From a compliance perspective:

• Statutory redundancy pay remains a statutory entitlement if eligibility is met.
• Notice pay must be taxed correctly under post-2018 rules.
• The £30,000 threshold must be applied to qualifying termination elements only.

Settlement agreements must clearly distinguish between different elements of payment. A failure to do so can create confusion over tax treatment and undermine enforceability. Employers should also ensure negotiations are conducted appropriately, for example within properly framed without prejudice discussions where applicable.

5. Documentation and audit trail

Given the complexity of tax treatment, employers should:

• provide employees with a written breakdown of termination payments
• confirm which elements are taxable and why
• retain internal calculation records
• ensure payroll and HR are aligned

This is particularly important in larger restructures, where inconsistent treatment between employees can create grievance or discrimination risks.

Section summary
Redundancy pay up to £30,000 may fall within the tax-free termination payment threshold, but notice pay is treated differently under post-2018 rules and must be taxed as earnings. Employers must separate redundancy compensation from notice pay, apply employer Class 1A National Insurance where required and document the breakdown clearly. Tax misclassification can create HMRC liability and employee disputes long after the redundancy process concludes.

Section E: Consultation duties, collective redundancy risk and protective awards

Redundancy pay cannot be viewed in isolation from consultation obligations. In many tribunal claims, redundancy pay disputes sit alongside allegations that consultation was inadequate or that statutory collective obligations were breached. Where consultation rules are ignored, financial exposure can extend far beyond the redundancy payment itself. This section explains the consultation framework and the associated risk areas.

1. Individual consultation in all redundancy situations

Even where fewer than 20 redundancies are proposed, employers are required to act fairly in accordance with unfair dismissal principles. This includes carrying out meaningful individual consultation.

A fair redundancy process will usually involve:

• informing employees that their roles are at risk
• explaining the business rationale for the proposed redundancies
• identifying any selection pool
• setting out selection criteria
• allowing employees to comment on scoring
• considering suitable alternative roles

Consultation must be genuine and conducted before final decisions are made. Simply informing employees of a completed decision is unlikely to satisfy fairness requirements. Employers should ensure consultation aligns with established redundancy consultation requirements to reduce exposure.

While statutory redundancy pay may still be due even if consultation is defective, a flawed process significantly increases the risk of unfair dismissal claims.

2. Collective redundancy consultation (20 or more employees)

Where an employer proposes to dismiss 20 or more employees at one establishment within a 90-day period, additional statutory duties apply under the Trade Union and Labour Relations (Consolidation) Act 1992.

In these circumstances:

• Consultation must begin in good time and at least:
  • 30 days before the first dismissal takes effect (20–99 redundancies)
  • 45 days before the first dismissal (100 or more redundancies)
• Consultation must be conducted with appropriate employee representatives or recognised trade unions.
• The employer must provide prescribed information in writing, including reasons for the proposals, numbers and descriptions of employees affected, total number of employees at the establishment, proposed selection methods, proposed method of carrying out dismissals and proposed method of calculating redundancy payments.

The meaning of “establishment” is fact-sensitive and depends on how employees are assigned within the organisation. Multi-site employers should assess carefully whether redundancies fall within a single establishment for collective consultation purposes. For detailed guidance, see collective redundancy.

Importantly, the employer must also notify the Secretary of State by submitting form HR1. Failure to file an HR1 is a criminal offence and can result in prosecution of the company and, in some cases, its officers.

Redundancy pay calculations should be prepared early in collective processes, as the proposed method of calculation must be disclosed during consultation.

3. Protective awards: the financial risk

If an employer fails to comply with collective consultation obligations, an employment tribunal may make a protective award of up to 90 days’ gross pay per affected employee.

A protective award is punitive in nature and is not subject to the statutory weekly cap that applies to redundancy pay. It is not linked to actual financial loss and can significantly exceed the redundancy payment itself. For practical risk implications, see protective award guidance.

For example, an employer making 50 redundancies without proper consultation could face liability equivalent to up to 90 days’ pay per employee, in addition to statutory redundancy pay, notice pay and potential unfair dismissal compensation.

This makes early legal assessment critical when workforce reductions approach or exceed the 20-employee threshold.

4. Selection criteria and discrimination exposure

Although redundancy pay eligibility is based primarily on service and status, the wider redundancy process must comply with equality law.

Selection criteria that indirectly disadvantage protected groups, such as older workers, disabled employees or those on maternity leave, may give rise to discrimination claims. Employers should ensure criteria are objective, measurable and applied consistently.

Particular care is required where employees are pregnant, on maternity leave or returning from family leave, given enhanced priority rights to suitable alternative vacancies in certain circumstances. Failure to comply may result in automatically unfair dismissal and discrimination liability.

Employers should ensure managers are trained in consistent application of selection criteria and that records are retained to defend potential employment tribunal claims.

5. Time off to look for work

Employees with at least two years’ continuous service are entitled to reasonable time off during their notice period to seek new employment or arrange training.

Unless enhanced by contract, payment for this time off is capped at 40% of one week’s pay in total.

Although this entitlement is separate from redundancy pay, disputes often arise where employers deny or restrict time off. Such disputes can escalate tensions during the redundancy process and increase litigation risk.

Section summary
Redundancy pay obligations operate alongside consultation duties. Individual consultation is required in all redundancy dismissals, and collective consultation rules apply where 20 or more redundancies are proposed within 90 days at one establishment. Failure to comply can lead to protective awards of up to 90 days’ pay per employee, criminal liability for failure to file HR1 and increased unfair dismissal exposure. Employers should treat consultation compliance as integral to redundancy pay governance, not as a procedural formality.

Section F: Redundancy Payments Service (RPS), insolvency and employer liability

Redundancy pay becomes particularly complex where an employer is insolvent or facing formal insolvency proceedings. While statutory redundancy pay remains a legal entitlement for qualifying employees, the mechanism for payment may shift from the employer to the state. Employers and directors must understand how the Redundancy Payments Service operates and where liability ultimately rests.

1. When the Redundancy Payments Service becomes involved

The Redundancy Payments Service (RPS), part of the Insolvency Service, steps in where an employer is formally insolvent and unable to pay statutory sums owed to employees.

In these circumstances:

• An insolvency practitioner is appointed, for example in administration or liquidation.
• Employees submit claims to the RPS, usually via form RP1.
• The RPS assesses entitlement and pays qualifying statutory sums directly to employees, subject to statutory limits.

The RPS can cover:

• statutory redundancy pay
• certain unpaid wages, subject to caps
• accrued but untaken statutory holiday pay
• statutory notice pay, subject to statutory limits and mitigation rules

The payment is based on statutory limits, including the statutory weekly pay cap in force at the relevant time.

Employees must still satisfy the usual eligibility requirements for redundancy pay, including two years’ continuous service. Insolvency does not remove statutory entitlement; it changes the payment mechanism. For an overview of employee rights in business failure scenarios, see employee rights in insolvency.

2. Employer liability after RPS payment

When the RPS pays statutory redundancy pay, the government becomes a creditor in the insolvency. The Insolvency Service will seek to recover sums from the insolvent estate in accordance with insolvency law priorities.

Directors are not automatically personally liable for statutory redundancy payments simply because a company has become insolvent. However, personal exposure may arise in cases involving wrongful trading, fraudulent trading or breach of directors’ duties.

For directors navigating financial distress, early professional advice is essential. Continuing to trade while insolvent without appropriate oversight can increase personal risk.

3. Consultation duties during insolvency

Redundancy consultation obligations do not disappear because a company is insolvent. Collective consultation duties may still apply where the statutory thresholds are met. Although there is a limited “special circumstances” defence in certain cases, this does not remove the obligation to consult; it may only reduce liability where full compliance was not reasonably practicable.

Employers and insolvency practitioners should therefore assess:

• whether collective consultation thresholds are met
• whether HR1 notification is required
• how statutory redundancy pay liabilities interact with available funds

Failure to comply can still result in protective awards and tribunal claims.

4. Financial modelling and early risk management

Even in insolvency scenarios, disputes can arise about eligibility for redundancy pay, length of service calculations, week’s pay calculations and entitlement to notice pay.

For solvent employers considering restructuring to avoid insolvency, modelling redundancy pay liabilities in advance is critical. Underestimating redundancy costs can accelerate financial distress.

Before confirming headcount reductions, employers should consider:

• total statutory redundancy pay exposure
• notice pay liability
• accrued holiday pay
• enhanced redundancy scheme obligations
• potential protective award risk

Redundancy pay must therefore be treated as part of corporate financial planning and governance, not as a reactive payroll exercise.

Section summary
Where an employer is insolvent, statutory redundancy pay may be paid by the Redundancy Payments Service, subject to statutory limits. The Insolvency Service then claims in the insolvency as a creditor. Insolvency does not remove redundancy pay entitlement, nor does it automatically remove consultation duties. Employers and directors must manage redundancy pay liabilities carefully in financially distressed situations to limit further exposure.

Section G: Managing redundancy pay risk – employer best practice

Redundancy pay disputes rarely arise in isolation. They are usually the result of wider process failures: poor workforce planning, inconsistent scoring, misapplied service dates, unclear communications or rushed payroll calculations. Employers need a governance-led approach to redundancy pay that integrates legal compliance with operational control.

1. Audit eligibility before consultation begins

Before announcing redundancies, employers should conduct an internal audit covering:

• confirmed start dates and continuity of service
• identification of employees approaching two years’ service
• TUPE transfer histories
• employees on maternity or other family leave
• those on long-term sickness absence
• atypical workers whose status may be disputed

This allows the organisation to model statutory redundancy exposure accurately and avoid eligibility disputes once consultation begins.

Where employees are close to the two-year threshold, careful assessment of statutory notice rules is required to avoid underpayment.

2. Align HR, payroll and legal functions

Redundancy pay errors frequently occur because HR and payroll operate in silos.

Best practice includes:

• legal review of eligibility criteria
• payroll verification of week’s pay calculations
• cross-checking statutory caps applicable at termination date
• documented sign-off of each redundancy calculation

In larger exercises, creating a central redundancy calculation template helps maintain consistency across affected employees.

3. Document calculations clearly and transparently

Each affected employee should receive a written breakdown showing:

• years of service counted and any capped years excluded
• age band allocation
• weekly pay used and whether capped
• total statutory redundancy pay
• notice pay calculation
• tax treatment breakdown

Transparency reduces suspicion and discourages speculative claims.

4. Integrate redundancy pay with consultation strategy

Redundancy pay discussions often shape the tone of consultation.

Employers should:

• explain how statutory redundancy pay is calculated
• clarify whether enhanced redundancy applies
• confirm how notice will be handled
• outline tax treatment in general terms

Where collective consultation applies, the proposed method of calculating redundancy pay must be disclosed to representatives. Failing to prepare this early can delay consultation or undermine trust.

5. Assess suitable alternative employment properly

Refusal of suitable alternative employment can remove redundancy pay entitlement, but only if the refusal is unreasonable.

Best practice includes:

• making offers in writing before termination
• clearly outlining differences between roles
• confirming start dates within the statutory four-week window
• documenting the trial period
• recording reasons for refusal

Prematurely withdrawing redundancy pay on the assumption that refusal was unreasonable creates litigation risk.

6. Manage discrimination and automatically unfair dismissal risk

Redundancy pay compliance does not eliminate exposure to discrimination or automatically unfair dismissal claims.

Selection matrices should be reviewed for indirect discrimination impact. Reasonable adjustments must be considered for disabled employees. Priority rights for certain employees on family leave must be honoured where suitable alternative roles exist.

A redundancy process that is legally flawed may result in compensation far exceeding statutory redundancy pay.

Section summary
Redundancy pay compliance requires coordination, documentation and early financial modelling. Employers who audit eligibility, align HR and payroll, document calculations transparently and integrate redundancy pay into consultation planning significantly reduce tribunal exposure.

Section H: Redundancy Pay FAQs

1. Is redundancy pay mandatory in the UK?

Yes. Statutory redundancy pay is mandatory where an employee is dismissed by reason of redundancy, has at least two years’ continuous service and has not lost entitlement through disqualification.

2. How much redundancy pay is an employee entitled to?

It depends on age, length of service and gross weekly pay, subject to statutory caps. The maximum statutory redundancy pay is limited by the annual weekly pay cap and the 20-year service limit.

3. Does redundancy pay include notice pay?

No. Notice pay is separate and must be calculated and taxed independently.

4. Is redundancy pay tax-free?

Qualifying termination payments may be paid free of income tax up to £30,000 in total. Amounts above that threshold are subject to income tax and employer Class 1A National Insurance.

5. What happens if redundancy pay is underpaid?

Employees may bring a claim in the employment tribunal. Claims may also be combined with unfair dismissal or breach of contract allegations.

6. Can redundancy pay be enhanced?

Yes. Employers may offer enhanced redundancy pay through contract or policy, provided it does not fall below the statutory minimum and is applied consistently.

Conclusion

Redundancy pay is a statutory entitlement embedded within a broader legal framework that includes consultation duties, notice rights, tax compliance and discrimination law. While the calculation formula appears straightforward, the surrounding compliance risks are significant.

Employers who treat redundancy pay as a governance issue rather than a payroll task are better positioned to manage restructuring risk. Early eligibility auditing, careful calculation of week’s pay, correct tax treatment, compliance with collective consultation duties and transparent communication all reduce tribunal exposure.

Redundancy pay compliance is not simply about applying a statutory formula. It is about integrating legal accuracy, financial planning and procedural fairness into every stage of workforce change.

Glossary

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