Pillar Guide · Updated May 2026
UK Statutory Redundancy Pay: Formula, Caps and Tax Treatment for 2025/26
UK statutory redundancy pay is the legal minimum compensation an employer must pay to an employee dismissed by reason of redundancy after at least two years of continuous service. Set by the Employment Rights Act 1996 and uprated each April, the formula combines an age-banded multiplier (0.5, 1, or 1.5 weeks per year of service) with a weekly pay cap (£719 for 2025/26) and a 20-year service limit. The statutory maximum payable is therefore £21,570. Crucially, the first £30,000 of redundancy and other termination payments is tax-free and NI-free under section 401 of ITEPA 2003. This pillar guide explains every meaningful aspect for 2025/26: eligibility, the age-banded formula, notice periods, the tax treatment, contractual top-ups (financial services often pays 2-4 weeks per year), the National Insurance Fund claim via RP1 if your employer is insolvent, and a worked example for an employee with 8 years of service at £42k.
Eligibility
Statutory redundancy pay is available to employees (a specific legal category) with at least 2 years of continuous service, dismissed by reason of redundancy as defined in section 139 of the Employment Rights Act 1996. The statutory definition: the employer's business is ceasing, the workplace is closing, or the particular work the employee was doing has ceased or diminished.
Continuous service runs from the start of employment to the effective date of termination, including periods of authorised absence (sick leave, maternity, jury service) but excluding gaps where the employment was formally ended and later restarted. Transfers under TUPE preserve continuous service across the transfer. Service with associated employers also counts under section 218 ERA. The 2-year minimum has been the threshold since 1980, although it was briefly reduced to 1 year during the late 1990s before being restored.
Who is excluded: self-employed contractors and freelancers (they have no employment relationship at all); agency workers without employee status with the end client; office holders such as company directors who have not been formally employed; and casual workers without mutuality of obligation. Crown employees (civil servants), armed forces, fishing crew on share-fishing arrangements, and apprentices in certain stages have specific separate rules. Employees who refuse a reasonable offer of alternative employment lose their right to redundancy pay (see the alternative employment section below).
The Age-Banded Formula
Statutory redundancy is calculated using three weights based on age in each year of service:
| Age during year of service | Weeks of pay per year |
|---|---|
| Under 22 | 0.5 of a week |
| 22 to 40 | 1 week |
| 41 or older | 1.5 weeks |
Years of service are capped at 20 — additional years above 20 do not add to statutory entitlement. The maximum theoretical entitlement is 20 × 1.5 × £719 = £21,570 (2025/26). This is achievable only by an employee aged 61+ with 20+ years of service at or above the £719 weekly cap.
The formula uses age during each year of service, not age at termination. So an employee aged 45 with 25 years of service has 4 years at 0.5 weeks (ages 17-21), 19 years at 1 week (ages 22-40), and the most recent 6 years at 1.5 weeks (ages 41-45) — but the total years are capped at 20, so only 20 of those 25 years count. The calculation works backwards from the termination date to pick the 20 highest-weight years (the most recent 20 in age order). Most employment tribunals and HMRC calculators provide a step-by-step output that breaks down the figure year by year.
The £719 Weekly Pay Cap
The 2025/26 statutory cap on a “week's pay” is £719, set by the Employment Rights (Increase of Limits) Order 2025 and applicable to redundancies on or after 6 April 2025. The cap is uprated each April based on the Retail Prices Index, with the government announcing the new figure in February or March each year. Recent history: £464 in 2014, £495 in 2017, £525 in 2019, £544 in 2020, £571 in 2022, £643 in 2023, £700 in 2024, £719 in 2025.
For employees on regular hours and pay, the “week's pay” is calculated as gross weekly pay (before tax and NI) from the most recent normal pay period. For variable-hours, shift or commission-based workers, it is the average of the 12 weeks immediately preceding the date the redundancy notice was issued, excluding any weeks of zero earnings.
The cap applies only to statutory redundancy pay — contractual schemes that pay actual salary at higher rates are not limited. An employee earning £1,200/week receives statutory redundancy capped at £719/week, but a contractual top-up using actual £1,200/week salary may add several thousand pounds. Employer-paid pension contributions and benefits in kind are not part of “a week's pay” for statutory purposes; only basic salary and contractual bonuses included in the normal pay calculation count.
The £30,000 Tax-Free Umbrella
Section 401 of ITEPA 2003 makes the first £30,000 of redundancy and other employment-termination payments tax-free and NI-free. The £30,000 covers the aggregate of all termination payments combined: statutory redundancy, contractual redundancy, ex gratia payments, compromise/settlement amounts, and other compensation. It is not £30k per element. Statutory redundancy is typically the first to use up the allowance, contractual top-ups consume the rest.
Above £30,000 the excess is taxable. For tax: charged at the employee's marginal income tax rate (20%, 40% or 45%) in the year of receipt. For NI: employer NI applies on the excess but NOT employee NI (a benign quirk of section 7A SSCBA 1992). So a £50,000 total package nets £30,000 tax-free, £20,000 taxable at marginal rate. For a higher-rate employee that's £20,000 × 40% = £8,000 of income tax, leaving £42,000 net.
Important exclusions from the £30k umbrella since April 2018: payment in lieu of notice (PILON) is now always treated as earnings and taxed/NIed in full, even if labelled as an ex gratia payment. The pre-2018 distinction between contractual PILON (taxed) and non-contractual PILON (£30k-eligible) was abolished by the post- employment notice pay (PENP) calculation rules. Other excluded items: accrued holiday pay (always earnings); bonuses (earnings); shares vested at termination (earnings under separate share scheme rules); pension contributions paid into your registered pension by your employer at termination (excluded from the £30k by section 408 ITEPA — a useful planning route for higher earners with redundancy packages above £30k).
Notice Periods and Garden Leave
Statutory minimum notice under section 86 ERA 1996: 1 week if 1 month to 2 years service; thereafter 1 additional week per year of service up to a maximum of 12 weeks (reached at 12 years service). Your contract may give more — many do, especially for senior roles where 3-6 months contractual notice is common. The longer of contractual or statutory notice applies.
During notice you remain employed and entitled to normal pay, benefits and accrual of holiday and pension. Three options for how the notice is structured:
- Worked notice: you continue working as normal until the termination date. Most common for shorter notice periods (1-4 weeks).
- Garden leave: you remain employed (and paid) but are excluded from the workplace and not required to perform duties. Useful for employer in sensitive roles (sales, M&A, IP) to prevent disclosure or competitor poaching. Typical for senior roles with 3-6 month notice.
- PILON (Payment in Lieu of Notice): the employer pays a lump sum equivalent to the notice value and ends employment immediately. Since April 2018 the PILON amount is fully taxable and NIable under PENP rules — no £30k umbrella shelter.
Notice pay does not count toward statutory redundancy entitlement — they are calculated separately. So an employee with 10 years service at £600/week receives statutory redundancy of around £6,000 PLUS 10 weeks of notice pay at £600/week (£6,000), totalling £12,000. The £30k tax-free umbrella covers the redundancy but not the PILON if used (PILON is fully taxable). If notice is worked rather than PILONed, the notice pay is normal salary taxed as earnings throughout the notice period — also outside the £30k umbrella.
Contractual Redundancy
Many UK employers — particularly in financial services, professional services, broadcasting, and large public sector employers — offer contractual redundancy that exceeds the statutory minimum. Common structures:
- 2-4 weeks of full pay per year of service, not capped at £719.
- Additional flat payments (e.g. £5,000-£20,000 lump sum on top).
- Enhanced notice periods (3-12 months versus statutory 12 weeks max).
- Continued health insurance, life cover, share options or pension contributions for several months.
- Outplacement support (typically £5,000-£15,000 value, often via specialist providers).
Contractual schemes are set out in the employment contract, collective agreements, staff handbooks, or established custom and practice. Once a scheme is in place and communicated, the employer cannot easily reduce it without re-negotiating (which for unionised workforces requires collective consultation).
The £30k tax-free umbrella covers the total package; anything above is fully taxable. For a senior banker with 10 years service at £150,000 receiving 4 weeks per year contractual: £150,000 / 52 × 4 × 10 = £115,385 contractual redundancy. Plus 6 months PILON £75,000 (taxed as earnings) and accrued bonus £25,000 (taxed as earnings). The £30k umbrella shelters £30k of the £115,385 redundancy element only; the remaining £85,385 is taxable at marginal rate (likely 40% with some at 45%). A common planning route is to direct excess redundancy (above the £30k cap) straight into a pension to avoid the income tax charge — limited only by the annual pension allowance and the £40k after-redundancy taper if higher-rate.
Insolvency and the National Insurance Fund (RP1)
If your employer becomes insolvent (formal liquidation, administration, or CVA) and cannot pay redundancy pay, you can claim from the National Insurance Fund (NIF) via form RP1 submitted online at gov.uk. The NIF is administered by the Insolvency Service on behalf of the Department for Business and Trade.
What the NIF pays (subject to statutory caps and the £719 weekly limit):
- Statutory redundancy pay using the full age-banded formula and 20-year cap.
- Statutory notice pay (1-12 weeks based on service).
- Accrued holiday pay (up to 6 weeks).
- Unpaid wages (up to 8 weeks at the £719 weekly cap).
- Unpaid pension contributions that the employer should have made into your pension (subject to limits).
Contractual top-ups above statutory amounts are NOT covered by the NIF. They become unsecured creditor claims in the insolvency, where typical recovery rates are 0-20p in the pound. Submit RP1 online with your termination date, last day of work, employer details, length of service, weekly pay, and the insolvency reference. The NIF typically pays within 6-12 weeks of an approved claim. The Insolvency Service then recovers what it can from the insolvency estate, becoming a preferential creditor for the amounts paid (which is why the NIF often takes a hit but not the full amount). Tax is deducted from NIF payments at basic rate via PAYE.
Alternative Employment
Before making you redundant, your employer must, where reasonably possible, offer suitable alternative employment within the same business under section 138 ERA 1996. The offer must be in writing (or clearly documented), made before the dismissal takes effect, and the new role must start within 4 weeks of the old role ending.
“Suitable” is judged on several factors: job content, pay and benefits, location, working hours, status and prospects. A like-for-like role at the same pay in the same location is clearly suitable; a substantially different role at lower pay in a distant location is clearly not. The middle ground is fact-specific and often disputed at employment tribunal.
If you accept a suitable alternative, you enter a 4-week trial period (extendable for training time) during which you can decide whether to stay. Resigning during a valid trial period restores your redundancy entitlement. Refusing a reasonable alternative offer voids your right to statutory redundancy pay entirely — you are treated as having resigned. Refusing an unreasonable offer preserves it. Maternity, paternity, adoption and shared parental leave protections continue throughout the redundancy process: pregnant employees and those on family leave have priority for suitable alternative employment under section 10 of the Maternity and Parental Leave Regulations 1999.
Worked Example: 8 Years Service at £42,000
An employee aged 38 at termination, with 8 complete years of continuous service ending in 2025/26, earning £42,000/year (£808/week). Statutory redundancy calculation:
- Years served at age 22-40: all 8 years (employee was 30-38 during these years), each weighted 1 week per year.
- Weekly pay £808 capped at £719 (2025/26 cap).
- Statutory redundancy = 8 × 1 × £719 = £5,752.
Plus statutory notice pay of 8 weeks (1 week per year of service): 8 × £808 (actual salary, not capped for notice) = £6,464. The notice may be worked, garden leave, or PILONed. If PILONed, the £6,464 is taxed and NIed in full as normal earnings.
Total termination package: £5,752 statutory redundancy + £6,464 notice = £12,216. Tax treatment:
- £5,752 redundancy: tax-free under the £30k umbrella.
- £6,464 PILON: taxed at marginal rate (20% basic = £1,293 tax) + employee NI (8% above the per-period PT, roughly £400) + employer NI (15%, £970, paid by employer).
- Net to employee: roughly £4,771 PILON net + £5,752 redundancy = £10,523.
If the employer offers a contractual top-up of, say, 2 weeks per year on top of statutory (a common scheme): 8 × 1 × £808 (actual salary) = £6,464 contractual. This stacks on top of the statutory £5,752 redundancy, total redundancy element £12,216, still entirely within the £30k umbrella so tax-free. Combined package now £12,216 redundancy + £6,464 PILON = £18,680 gross, net of PILON tax/NI roughly £17,000. Significantly better than statutory minimum. Always check your contract or staff handbook for any contractual top-up before negotiating.