How Redundancy Pay Works in the United Kingdom
In the United Kingdom, when an employer retrenches (makes redundant) an employee, the Employment Rights Act 1996 (Employment Rights Act 1996) requires a minimum statutory redundancy payment of one week's remuneration for each completed year of continuous service. Many employers negotiate more generous packages.
The tax treatment of redundancy packages is favourable compared to normal income. Severance pay is taxed using the retirement lump sum tax table, where the £30,000. This means that for many retrenched employees, a significant portion of their severance is received tax-free.
However, notice period pay (payment in lieu of notice) is treated as normal employment income and taxed at your regular PAYE rate. Understanding this distinction is important for estimating your actual take-home amount from a redundancy package.
Frequently Asked Questions
How is statutory redundancy pay calculated in the United Kingdom?
The Employment Rights Act 1996 minimum is 1 week's pay per completed year of service. Weekly pay is monthly salary × 12 ÷ 52. For example, on a £25,000/month salary with 5 years of service: £25,000 × 12 ÷ 52 × 5 = £28,846.
How is statutory redundancy pay taxed in the United Kingdom?
Severance from redundancy uses the retirement lump sum tax table: the £30,000. This is more favourable than normal PAYE rates.
What is included in a redundancy package?
A typical package includes statutory redundancy pay (minimum 1 week per year), notice period pay, accrued leave payout, and sometimes a negotiated additional lump sum. Pro-rata bonus and pension withdrawals may also apply.
Is notice period pay taxed differently from statutory redundancy pay?
Yes. Notice pay is taxed as normal income (PAYE at 18%–45%). Severance pay uses the more favourable retirement lump sum tax table where the £30,000.
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