Redundancy Money

When an employee is made redundant, their employer must pay them redundancy money. Here, our specialist HR and employment law advisors discuss the different types of redundancy money employees are entitled to and explain how to calculate them.

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What Are The Different Types Of Redundancy Money?

Employees who have been made redundant may be entitled to several types of redundancy money. They include the following:

• Statutory Redundancy Pay

Employees who have worked for your organisation continuously for at least two years are entitled to statutory redundancy pay. If the employee’s contract of employment contains provisions relating to redundancy pay, you must abide by them. If you don’t, you will be in breach of contract.

If the employee’s contract of employment doesn’t contain terms relating to redundancy pay, the employee will be entitled to statutory redundancy pay. Statutory redundancy pay is the absolute minimum you can pay an employee you have made redundant.

Statutory redundancy pay is based on an employee’s age, length of service, and salary. It is calculated as follows:

If the employee is under 22, they are entitled to half a week’s pay for each year of service.
If the employee is aged between 22 and 41, they are entitled to a week’s pay for each year of service.
If the employee is aged over 41, they are entitled to a week and a half’s pay for each year of service.

An employee’s weekly pay for the purposes of redundancy pay is capped at £700 (2024-25), regardless of how much they actually earn. Furthermore, their length of service is capped at 20 years. These payments are tax free.

If you require help with calculating redundancy pay or any other part of the redundancy process, our HR and employment law experts are perfectly placed to provide the advice you need.

• Holiday Pay

If a redundant employee has accrued holiday that they have not used by the time their employment with your business ends, you must pay them for that holiday as part of their redundancy money. These payments are known as ‘payments in lieu of holiday’. These payments are subject to tax and NI.

An employee’s holiday entitlement might be detailed in their contract of employment. If it isn’t, they will be entitled to statutory annual leave. By law, most employees must be permitted at least 28 days leave each year, which can include bank and other public holidays.

You calculate an employee’s pay in lieu of holiday in accordance with how much accrued leave they have remaining and their daily pay rate. If you need advice, our specialist HR advisors are on hand to help.

• Payment In Lieu Of Notice

Redundant employees must be given the appropriate notice and paid during their notice period.

The employee’s notice period might be set out in their contract of employment. If it isn’t, you must give them at least statutory notice.

An employee’s statutory notice period depends on how long they have worked for you. If their length of service is between one month and two years, you must give them one week’s notice. If they have worked for you for between two and twelve years, their statutory notice period is one week for each full year of service. If they have worked for you for 12 years or more, the notice period is capped at 12 weeks’ notice.

You might prefer to pay an employee in lieu of notice as part of their redundancy money rather than have them work their notice period, for example because you suspect they will disrupt other employees if they continue coming to work. This type of payment is known as a ‘payment in lieu of notice’ or ‘PILON’.

You can use PILON if permitted by the employee’s contract of employment or if the employee agrees. If the employment contract deals with PILON, it might state what the payment should include, for example basic pay but not benefits, and when the payment should be made. Checking for these provisions is crucial in adhering to your contractual obligations regarding PILON. Speak to us if you’re unsure. We’ll review the relevant contract terms and advise on their effects. If the contract does not deal with PILON, we’ll explain your legal position and advise you on how to proceed.

How Can We Help?

Small businesses from around the UK rely on our expert support and guidance to navigate HR and employment law issues, including those arising in connection with redundancies. We offer straightforward advice in plain English tailored to your commercial reality, giving you peace of mind that your business is legally compliant and that your risk of facing tribunal proceedings is minimal.