A redundancy figure can look generous until you separate what your employer already owes you from the amount being offered for a clean, agreed departure. Knowing how to calculate redundancy settlement pay helps you assess whether the proposal is fair, identify missing sums and decide whether there is room to negotiate before signing anything.
In the UK, a redundancy settlement is rarely one single payment. It may include statutory redundancy pay, notice pay, accrued holiday, an enhanced redundancy sum and sometimes an additional payment under a settlement agreement. Each part is calculated and taxed differently. The wording matters as much as the headline figure.
Start by separating the payments
Ask for a written breakdown rather than relying on a total. A clear proposal should distinguish between your contractual and statutory entitlements, which you would normally receive even without a settlement agreement, and any additional compensation offered in exchange for settling potential claims.
The main elements are usually statutory redundancy pay, contractual or enhanced redundancy pay, notice pay or pay in lieu of notice, untaken holiday pay, unpaid salary, bonus or commission, benefits during notice, and an ex gratia termination payment. Not every package will contain every element, but combining them without explanation can make a modest offer appear larger than it is.
For example, if an employer offers £25,000, that is not necessarily £25,000 of extra compensation. It could include £10,000 statutory redundancy pay, £6,000 notice pay, £2,000 holiday pay and £7,000 as an additional settlement payment. The first three figures may already be due under your contract or the law.
How to calculate statutory redundancy pay
Employees with at least two years’ continuous service are generally entitled to statutory redundancy pay if they are genuinely being made redundant. The calculation is based on three things: your age, length of continuous service and weekly pay.
The statutory formula is:
- half a week’s pay for each full year of service when you were under 22;
- one week’s pay for each full year of service when you were aged 22 to 40; and
- one and a half weeks’ pay for each full year of service when you were 41 or over.
Only a maximum of 20 years’ service counts. There is also a statutory cap on a week’s pay, which changes each April. If your actual weekly earnings exceed that cap, the statutory calculation must use the capped figure instead. This is why a long-serving, highly paid employee may receive a lower statutory amount than expected.
Your employer should use your age at the date your employment ends, not the date consultation begins or the date you receive the proposal. Continuous service can be more complicated where there have been changes of role, group companies, temporary breaks or transfers. It is sensible to check this carefully rather than assume the start date on a payslip tells the whole story.
A simple statutory redundancy example
Suppose you are 45 when your employment ends, have worked continuously for 12 full years and your weekly pay is below the statutory cap. Your entitlement would usually be calculated as 12 years multiplied by one and a half weeks’ pay: 18 weeks’ pay in total.
If you turned 41 during those 12 years, the calculation is split. Years worked before age 41 attract one week’s pay, while years worked from age 41 attract one and a half weeks’ pay. The detail can make a meaningful difference.
Statutory redundancy pay is a legal minimum, not necessarily the appropriate final settlement figure. A contract, staff handbook, collective agreement or established employer practice may provide a better enhanced redundancy formula.
Check the enhanced redundancy terms
Many employers offer enhanced redundancy pay, particularly where there is a wider restructuring or a desire to agree an amicable exit. An enhanced scheme might provide, for instance, a set number of weeks’ actual pay for every completed year of service, sometimes with an additional lump sum.
There is no universal formula. The key question is whether the scheme is contractual, discretionary or part of a negotiated settlement. If it is contractual, the employer may be bound by it. If it is discretionary, there may still be scope to question an inconsistent approach, especially if colleagues in comparable roles have been treated more favourably.
When comparing an enhanced offer, calculate the value using your actual weekly or monthly salary, then compare it with statutory redundancy pay. Also check whether the employer has imposed a cap, excluded bonus or commission, or counted only completed years of service. These provisions can materially reduce the figure.
Add what you are owed during notice
Redundancy does not remove your right to notice. Your minimum statutory notice is one week for each complete year of service, up to 12 weeks, after one month’s employment. Your contract may provide a longer notice period, which will usually apply if it is more favourable.
You may work your notice, be placed on garden leave, or receive a payment in lieu of notice, often called PILON. The agreement or contract should make clear which applies. If you are paid in lieu, check whether the payment covers basic salary only or also pension contributions, car allowance, private medical cover, commission and other benefits that would have continued during notice.
Notice pay is normally subject to tax and National Insurance contributions. It should not be presented as tax-free compensation simply because it is paid alongside redundancy money.
Include holiday, salary and variable pay
You should also be paid for holiday accrued but not taken by your termination date. Check the holiday year in your contract and calculate entitlement on a pro-rata basis. If you have taken more holiday than accrued, an employer may seek to deduct the excess only where the contract permits it.
Outstanding salary, expenses, bonus and commission need separate attention. Whether a bonus or commission payment is due will depend on the scheme rules, your contract and the point at which the entitlement arose. A payment that is described as discretionary is not automatically unavailable, particularly where targets were achieved before termination.
For senior employees, the value of share awards, long-term incentives and deferred bonus arrangements may exceed the basic redundancy sum. The treatment of these awards should be expressly addressed rather than left to a vague statement that benefits will end on termination.
Understand tax before comparing figures
A common source of confusion is the £30,000 tax exemption. In broad terms, genuine termination compensation, including statutory redundancy pay, can often be paid free of income tax up to £30,000. Amounts above that threshold are usually taxable. Employer National Insurance contributions may also arise on taxable amounts above £30,000.
However, notice pay, holiday pay, wages, bonuses and many contractual payments are generally taxable in the normal way. The tax label in a settlement agreement does not decide the position by itself. HMRC looks at the substance of the payment.
Ask whether the figures are gross or net, which deductions will be made and whether the employer gives any tax indemnity. A tax indemnity can make you responsible if HMRC later decides that tax should have been deducted, so it deserves careful review. A proposed payment that appears higher on paper may be worth less after tax than a smaller, properly structured alternative.
Assess the additional settlement payment
A settlement agreement is voluntary. In return for compensation, you are normally asked to waive specific employment claims and accept confidentiality, non-disparagement and other obligations. That additional payment should reflect more than your statutory redundancy entitlement.
There is no fixed multiplier that makes an offer fair. The right figure depends on the strength and value of any potential claims, the quality of the redundancy process, your length of service, seniority, notice rights, prospects of finding a new role and the terms you are being asked to accept. A restrictive covenant, an unfavourable reference clause or a broad confidentiality provision may justify negotiating for better terms, not merely more money.
It is also worth considering the practical value of non-financial protections. An agreed reference, a clear internal and external announcement, continued benefits for a period and a contribution to independent legal advice can be highly important to your next move.
A practical way to check the offer
Before you decide, create a side-by-side calculation. In one column, list the sums you are already entitled to receive: statutory or contractual redundancy pay, notice, holiday, salary and any earned variable pay. In the other, list the genuinely additional compensation and the non-financial terms offered for signing the agreement.
Then check the dates. A payment due on termination is different from one paid in the next payroll cycle, and a vague promise about a bonus or reference may be difficult to enforce later. Ensure the settlement agreement records the agreed figures, payment dates, tax treatment and any agreed reference in precise terms.
You are usually given a period to consider a proposed settlement agreement, and the agreement will need independent legal advice before it can validly waive statutory employment claims. Do not feel pressured to treat the first figure as final. A focused review can establish whether the calculation is correct and whether the terms protect your interests.
A redundancy settlement should leave you with clarity, not unanswered questions. Once every component has been identified and valued, you can approach the conversation with confidence and ask for an outcome that reflects both what you are owed and what you are being asked to give up.