Redundancy pay

Redundancy pay is the UK statutory lump sum owed when an employee with two years' service is dismissed because the job no longer exists.

For global payroll teams, the operational issue is the same in every termination cycle: how to model and run the payment alongside the parallel concepts in other countries. The UK redundancy line is one of the lowest-paying statutory floors in the major payroll markets.

France runs indemnité de licenciement on its own scale with no UK-style cap. Germany runs Abfindung as a customary settlement rather than a statutory entitlement. Spain runs indemnización por despido at 20 days of salary per year of service.

The US has no federal statutory severance at all. Treating any one of these as a global template is the most expensive mistake in cross-border termination modelling.

What does redundancy pay mean in payroll?

In payroll, redundancy pay is a transaction code that runs through gross-to-net under specific tax and NIC rules. The mechanic is not optional once the statutory test is met.

What the statutory entitlement covers

Statutory redundancy under the Employment Rights Act 1996 is calculated on three inputs: weekly pay, complete years of service, and the employee's age in each year of that service.

The 2025-26 weekly cap is £719, and the maximum statutory payment is £21,570 (20 weeks at the cap). The age-banded weeks formula counts each full year of service as half a week's pay under age 22, one week's pay between 22 and 40, and one and a half weeks' pay from age 41 onwards.

The enhanced layer most employers add

The statutory layer is the floor. Many employers offer enhanced redundancy under contractual or collective agreements, often at three to four weeks of pay per year of service uncapped.

The enhanced layer interacts with tax rules differently from the statutory floor. The £30,000 ITEPA 2003 s.401 tax-free threshold applies to the enhanced layer, not to the statutory portion (which is tax-free in full regardless of amount).

Why payroll codes matter at the final FPS

Statutory redundancy is reported separately on the final Full Payment Submission under post-cessation pay arrangements. The £30,000-exempt portion of any enhanced payment is reported but not taxed; the excess is taxed at the employee's marginal rate through PAYE. The coding mistake is what triggers the HMRC compliance check.

How is UK statutory redundancy actually calculated?

The age-banded weeks formula is the unusual feature. Each year of service earns credit at a different rate depending on the employee's age at that year.

The dataset at severance, notice, and statutory leave by country tracks the equivalent floors in 40 jurisdictions. The UK headline is consistently one of the lowest statutory payouts in the comparison.

The number you actually pay is usually higher because the contract or the collective agreement adds an enhanced layer. Model the statutory cap first, then layer the enhancement and its tax treatment on top.

How does redundancy pay compare across countries?

Every major payroll market has a termination-payment concept, but each runs on its own mechanic. The same employee profile produces wildly different statutory exposure across the footprint.

The model produces the same answer for the same employee profile in two countries that bear no resemblance to each other. A senior employee with 15 years of service in France routinely exceeds the UK cap by a factor of three. See the severance pay entry for the parallel concept in detail.

The fix is to model each country on its own statutory and customary basis, not by analogy to the UK.

How does PAYE treat redundancy pay, and where is the £30,000 line?

Statutory redundancy pay is tax-free and NIC-free in full, regardless of amount.

Enhanced redundancy and other termination payments are tax-free up to £30,000 in total under ITEPA 2003 s.401, and taxable above that line. The £30,000 is a combined ceiling, not a per-payment allowance.

The PAYE treatment is reported through RTI on the final FPS using post-cessation pay arrangements. Statutory redundancy is reported separately from regular earnings; the £30,000-exempt portion of any enhanced payment is reported but not taxed; the excess is taxed at the employee's marginal rate through PAYE.

Two reporting points catch employers out. The first is that redundancy payments do not attract Class 1 employer NICs under SSCBA 1992 s.4, which is why bundling PILON into the redundancy figure looks attractive on paper and then unwinds at the next compliance check.

The second is that the Post-Employment Notice Pay (PENP) rule introduced in April 2018 taxes any notice-pay portion of the package as ordinary earnings. The £30,000 exemption applies to the genuine termination element only, not to the PILON portion. See the PILON entry for the PENP mechanic.

What do buyers consistently get wrong?

The recurring mistakes cluster into four moves visible across cross-border termination decks.

The first is mapping UK redundancy onto US headcount in a multi-country workforce reduction model. The US has no federal statutory severance for individual dismissals.

WARN Act applies only to mass layoffs above the 50/100 employee threshold and only requires 60 days of notice pay, not severance. Modelling US severance as "same as UK" understates the contractual settlement layer that is almost always paid to secure release of claims.

The second is mapping UK redundancy onto French indemnité de licenciement. The French statutory minimum runs at one-quarter of a month per year of service for the first ten years, then one-third, with no cap equivalent to the UK £21,570.

A senior employee with 15 years in France routinely exceeds the UK cap by a factor of three. The French line is also subject to social charges on the portion above six times the annual social-security ceiling.

The third is mapping UK redundancy onto German Abfindung. Germany has no statutory severance for individual dismissals.

Abfindung settlements at 0.5 month of salary per year of service are routine to secure a clean exit and avoid Kündigungsschutz protection claims. The German payment is contractual and almost always paid, but it never appears in a statutory-only cost model.

The fourth is treating the £30,000 ITEPA exemption as a discount on the statutory bill. It is not.

The exemption applies to the enhanced layer above the statutory floor, and the PENP portion is excluded entirely. We have seen the misapplied exemption quietly absorb six figures of HMRC interest before anyone notices.

What does an EOR or payroll provider handle?

The provider runs the local statutory calculation and the gross-up. The buyer keeps the substantive decisions and any layer above the statutory floor.

The collective redundancy threshold cuts in at 20 or more dismissals in a single establishment within 90 days. That triggers Section 188 consultation duties: 30 days minimum for 20-99 dismissals, 45 days for 100 or more.

Protective awards for failure to consult run at up to 90 days of actual pay per affected employee. Run the headcount and the timing through the Section 188 test before you announce; the protective award exposure is unrelated to and usually larger than the redundancy bill itself.

Redundancy pay FAQs

Is UK statutory redundancy pay taxable?

No. Statutory redundancy pay under ERA 1996 is tax-free and NIC-free in full, regardless of amount.

Enhanced redundancy on top of the statutory floor is tax-free up to a combined £30,000 ITEPA s.401 ceiling, and taxable above that line at the employee's marginal rate through PAYE.

Does the £30,000 tax-free threshold apply to PILON?

No. Since April 2018, the Post-Employment Notice Pay (PENP) rule taxes any notice-pay portion of a termination package as ordinary earnings.

The £30,000 exemption applies to the genuine termination element only. Bundling PILON into the redundancy figure to fit it under £30,000 is the most common compliance error in this category.

Who qualifies for UK statutory redundancy pay?

Employees with at least two years of continuous service, dismissed because their job no longer exists under the ERA 1996 definition.

Workers and contractors are excluded outright. Performance dismissals, conduct dismissals, and mutual settlements sit outside the statutory framework, even when they look operationally similar to a redundancy.

How does UK redundancy compare to French or German termination pay?

The UK number is one of the lowest statutory floors in the major payroll markets. French indemnité de licenciement runs at 0.25 month per year for the first 10 years then 0.33 month per year, with no UK-style cap.

German Abfindung is customary at 0.5 month per year to clear Kündigungsschutz risk. A senior employee with 15 years routinely exceeds the UK cap by a factor of three in France. See the employer contributions entry for the tax architecture across jurisdictions.

Can an EOR run UK redundancy through final payroll?

Yes. The EOR runs the statutory calculation, the gross-up, the PENP calculation, and the final FPS submission.

The buyer retains the substantive decisions: redundancy versus settlement, enhancement scale, and any settlement above the statutory floor. The provider that cannot show the PENP working before the leaver date is the one that loses the HMRC compliance check. See the UK payroll providers shortlist for bureaux that handle PENP correctly.