Redundancy Pay Explained: How Much You Should Receive and What Is Tax-Free

Employees facing redundancy and employers needing to understand statutory redundancy pay obligations.

Explains the legal minimum redundancy pay, how it is calculated, and the exceptions to the statutory redundancy pay rules.

Knowing your entitlement to redundancy pay is crucial to ensure you receive the correct payment. Employees must understand the criteria, while employers should be aware of their legal responsibilities.

If you have been in the same job for two or more years and are made redundant, you will usually be entitled to redundancy pay. The legal minimum that you are entitled to receive is known as ‘statutory redundancy pay’. There are exceptions where you are not entitled to statutory redundancy pay, for example, if your employer offers to keep you on or offers you suitable alternative work, which you refuse without good reason.

How Statutory Redundancy Pay is Calculated

The amount of statutory redundancy pay you are entitled to is dependent on your age and your length of service. The payment is calculated based on the following:

• Under 22: Half a week’s pay for each full year of service.
• Aged 22 to 40: One week’s pay for each full year of service.
• Over 41: One and a half week’s pay for each full year of service.

Weekly pay is capped at £571, and the maximum length of service is capped at 20 years.

Redundancy Pay Limits

The maximum statutory redundancy pay you can receive is capped at £17,130 for the tax year 2022-23. There are slightly higher maximums in Northern Ireland.

In addition to statutory redundancy pay, an employer can choose to make a higher payment, or you may be entitled to one as a result of your employment contract.

Tax-Free Redundancy Pay

There is an overall £30,000 limit for redundancy pay that is tax-free, regardless of whether this is your statutory redundancy pay or a higher pay-out from your employer.

Real-World Application

Employees should verify their redundancy pay entitlement by checking their length of service, age, and the terms of their employment contract. Understanding the statutory limits can help you know whether you are receiving the correct redundancy payment. Employers should ensure they comply with the legal minimum redundancy pay rules and consider offering a higher amount if stipulated in the employment contract.

Risks and Consequences

If your employer fails to provide the correct redundancy pay, they could face legal consequences. Employees may also have a claim for additional payments if the redundancy pay falls short of what is required by law.

Next Steps

If you believe you are not receiving the correct redundancy pay, it’s important to review your employment terms and seek advice. Employers should ensure they are offering the correct redundancy pay and review their obligations regularly.

Get Help Reviewing Your Redundancy Payment in London

Redundancy pay can have tax implications depending on how much you receive and the circumstances surrounding your redundancy. Cigma Accounting, based in Kingston upon Thames in London, helps individuals navigate the complexities of redundancy pay, ensuring it is processed correctly for tax purposes, with expert support from our experienced tax accountant London team.

Redundancy pay is often tax-free up to a certain amount, but anything above this can be taxed. Individuals working or living around Surbiton and Thames Ditton often need clarity on how redundancy payments affect their tax code, and with physical offices across London, Cigma Accounting provides trusted guidance and accounting services London to ensure your redundancy pay is treated correctly and does not lead to unexpected tax bills.