Calculating redundancy

Employment law

How is redundancy calculated?

Redundancy can be a difficult process, and it’s important to know your rights. Our experts explain how redundancy payment is calculated.

28 April 2022

Reasons for redundancy

When it comes to how redundancy works, you can be made redundant for the following reasons:

  • The business you work within has or will cease to exist
  • The business has or will cease to exist in the location from which you work
  • The need for employees to carry out a particular type of work has, or will, diminish or cease to exist. It’s important to note that the focus is on the requirement of employees, so it’s still redundancy if a smaller number of employees are to complete the same amount of work.

This is rarely a pleasant experience, and so it’s important to know what to expect in terms of redundancy pay and what your rights are. The underlying principle is that employees who are dismissed for redundancy may be entitled to a statutory redundancy payment.

You may also be eligible for a compensatory award if your dismissal for redundancy is found to be unfair.

Our employment law specialist, Doreen Reeves, explains in detail how redundancy is calculated, and answers other queries relating to your redundancy payment:

How is redundancy calculated?

An employee who’s worked at a company for two continuous years is entitled to statutory redundancy pay as a minimum. Redundancy pay isn’t available to you if you’re classified as a ‘worker’, such as an independent contractor, agent or office holder (i.e., a Trustee or Appointee).

Your employer may also have their own policies for redundancy pay, so it’s always important to check this.

The amount of statutory redundancy pay you may receive is based on a number of factors. These include:

  • Age
  • Length of service
  • Weekly pay

If you were paid less than usual – for example, for furlough or maternity leave – you should use what you’re usually paid to calculate your redundancy.

You’re entitled to receive a week’s gross pay (currently capped at £643 per week as of 6th April 2023) for each year of service, multiplied by 0.5 for each year of service under 22 years of age and by 1.5 for each year of employment undertaken aged 41 and over (capped at a maximum of 20 years’ service).

The Gov.UK website has a handy calculator to help you calculate any statutory redundancy pay.

Who pays redundancy when a business closes?

In some circumstances it may be important to establish who pays redundancy when an employer cannot. If a business closes and is able to pay redundancy pay, then this should be paid as normal.

However, where an employer refuses to, or is unable to, pay you all or part of the redundancy pay, you could apply to the Secretary of State for the payment (or outstanding balance) to be paid out of the National Insurance Fund. You can find more information on the requirements and what you would need to bring a claim on here.

If the business is insolvent (in other words, it’s unable to pay any debts owed), then employees will need to seek support from the Government Insolvency Service.

How redundancy payments are taxed

Any redundancy payment up to £30,000 is tax free. This is inclusive of any other benefits, such as IT equipment and company cars, which will be given a cash value and added to the total paid.

Anything over the £30,000 will be taxed as normal, but it’s always worth double-checking that the calculations are right.

Are redundancy payments pensionable?

The tax-free redundancy payment of up to £30,000 isn’t counted as pensionable earnings and therefore isn’t subject to pension deductions. However, for your final salary payment the automatic enrolment deductions will apply as normal.

If you wish to put some of your redundancy payment into a pension as an employee, you may do but you’ll need to do so independently.

Can redundancy notice be retracted?

Yes, an employer may retract their redundancy notice, but only if you agree to this.

It’s important to note, though, that this could be classed as your employer providing you with a suitable alternative employment option, and therefore if you don’t agree to the notice being retracted it may impact your entitlement to a redundancy payment, because an Employment Tribunal could find that your rejection of the offer was unreasonable. An employment lawyer will be able to advise on your individual circumstances to ensure you achieve the most favourable outcome for you.

Can redundancy lead to an unfair dismissal claim?

Yes, redundancy can lead to an unfair dismissal claim. It may be unfair if a fair process hasn’t been followed or if discrimination plays a factor in the selection. Where unfair dismissal is found, you may also be entitled to a compensatory award for any financial losses flowing from the dismissal.

Each case will be highly individual. Your employment solicitor will be able to advise on your specific situation and let you know if you have a claim.

However, you only have three months from the date of the dismissal to bring an unfair dismissal claim, so it’s always worth getting advice as soon as possible.

To speak with one of our expert employment solicitors, simply call us on 0330 041 5869 Or, if you prefer, you can contact us via our online form or web chat.

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