How is redundancy pay calculated in the UK?

How is Redundancy Pay Calculated in the UK?

Redundancy pay in the UK is a form of compensation provided to employees who are dismissed from their jobs due to their position becoming unnecessary. This frequently arises from business restructuring, closures, or downsizing. Understanding how redundancy pay is calculated can help employees know what to expect should they face redundancy.

In the UK, statutory redundancy pay is calculated based on several factors: an employee's age, length of service, and weekly earnings, up to a statutory maximum amount. To qualify, an employee must have at least two years of continuous service with their employer.

The calculation is as follows: employees are entitled to receive:

• One and a half weeks’ pay for each full year of service when they are aged 41 or older.
• One week’s pay for each full year of service when they are aged 22 to 40.
• Half a week’s pay for each full year of service when they are aged under 22.

There is a cap on the weekly pay considered for redundancy calculations. As of the current financial year, the maximum weekly pay that can be used for these calculations is capped by the government (for example, £643 as of April 2023). This cap typically updates annually, so it is important to check the current cap when calculating redundancy pay.

The total number of service years an employee can claim redundancy for is capped at 20 years. Thus, the maximum possible redundancy payment is 20 years of service multiplied by the cap-adjusted weekly pay rate, calculated according to the above age brackets.

For example, consider an employee aged 45 who has worked for an employer for 15 years with a weekly pay (before any statutory cap) of £700. Their redundancy pay would be calculated as follows: for the 15 years of service, they receive 15 x 1.5 weeks of pay because they are over 41, totaling 22.5 weeks’ pay. Since the weekly pay cap applies, the calculation would use the capped rate, not the full £700. If the current cap is £643, the total redundancy payment would be 22.5 multiplied by £643, resulting in £14,467.50.

Employers may offer more generous terms than the statutory minimum, known as contractual redundancy pay, based on internal company policies or negotiated employment agreements. It's important for employees to check their employment contracts or consult their HR department for specific details.

Understanding the basics of redundancy pay calculation and keeping informed of any changes in government regulations ensures that both employers and employees can handle redundancy situations with clarity and fairness.