Redundancy payments

What redundancy payment are you entitled to?

With few exceptions, an employer will have to pay redundancy pay to those it has formally employed for more than two years. This may be statutory redundancy pay, which is worked out in a very specific way according to government rules, or the employer may offer more generous terms either because they are generous or because you are entitled to more as part of your contract of employment (this is always worth checking).

The amount of statutory redundancy pay differs depending on:

  • How old you are
  • How long you have worked for your employer continuously
  • Your salary
  • How close you are to retirement

Those with less than two years’ service do not have any right to redundancy pay, although a generous employer may still make an ex gratia payment. Casual, agency and contract staff who are not officially employees will also not have any right to redundancy pay.

For those permanent employees who have worked for the employer for more than two years:

  • Employees aged under 22 are entitled to half a week’s pay for each full year of service Employees aged 22-40 are entitled to one week’s pay for each full year of service
  • Employees who are aged 41 or over are entitled to 1.5 weeks’ pay for each full year of service.

For the purposes of working out statutory redundancy pay, weekly pay is capped at £330.

The way statutory redundancy pay is calculated is liable to change from time to time, so check the latest terms on the DirectGov website. There is also an interactive calculator to help you work out your entitlement.

More detail on how redundancy payments are calculated, including a detailed explanation of when redundancy pay is not paid, can be found on the Trades Union Congress website.

What about outplacement services?

Outplacement refers to support provided by a third party hired by your employer to help you get a new job. Some employers will offer outplacement services as part of your redundancy package, but these are not a right. In addition, some schemes require you to pay something toward them, usually as a deduction from your settlement. See our page on making the most of outplacement services for more on this.

Do I have to pay tax on my redundancy payment?

Tax is not payable on the first £30,000 of a redundancy payment, although it is payable in the normal way on any amount above that, and also on your final wages and accrued holidays.

Pay in lieu of notice, or PILON, is only taxable if your contract of employment specifies that it is, or if it is normal practice in your workplace to tax it. Otherwise, it is not taxable. However, if it is not treated as taxable pay, your PILON will be added together with your redundancy payment, and if this adds up to more than £30,000, then anything over the £30,000 is taxable. The Inland Revenue have made a statement explaining their position on PILONs.

Some employers have negotiated with the Inland Revenue to offer their employees the opportunity to divide their redundancy payment over more than one tax year, so it is worth checking whether this applies to you.

What if my employer is insolvent and cannot pay me?

The Department of Trade and Industry (DTI) will pay you directly and then attempt to recover the amount from the assets of the business. However, they will only ever pay the statutory minimum amount. You can lodge a claim with the company’s administrators if you were promised more, for example, in the terms of your contract.