Employers will always take pains when considering redundancies. Not only do they lose valuable talent, but any growth or expansion must stop. Despite intentions to save costs, it’s difficult to figure out redundancy payments.
It’s common for confusion to emerge with redundancy compensation. It often raises questions about how much redundancy pay is. These include how much compensation an employee is due, considering the number of years they’ve been in service.
Employees considered for redundancy should take care and discuss their options with employers.
So, what else should employers consider when examining redundancies?
What is redundancy pay?
Redundancy pay, otherwise known as statutory redundancy pay , is the compensation an employee gains when made redundant.
Employees normally have entitlement to statutory redundancy pay if they’ve worked for an employer for two or more years. And you’ve been working for your current employer for two years or more.
In regards to how redundancy pay works, calculations depend on an employee’s length of service. They also depend on the employee's age during this service.
Employees can have redundancy pay either in increments or in full. The decision of how to pay statutory redundancy pay depends on an agreement between the employer and the employees.
There are exceptions to those who can receive statutory redundancy, other than those with less than two years of service. These are:
- Police officers or members of the armed forces
- Crown servants, parliamentary staff members, or holder of a public office position
- A share fisherperson
- Domestic staff working for their immediate family
- Employees of a foreign government
How to work out redundancy pay
For redundancy pay in the UK, employers must pay:
- Half a week’s pay for each full year an employee was under the age of 22
- One week’s pay for each full year an employee was 22 or older, but under 41 years old
- One and half week’s pay for each full year an employee was 41 or older
The amount paid is also capped, with the length of service capping at 20 years.
The weekly pay is calculated by the average the employee earns per week over the 12 weeks before the date of the redundancy notice. This means that even if an employee’s age crosses the age barrier during their time of employment, their redundancy pay rate will be calculated by the previous 12 weeks.
- Adam has worked for a company for five years, from the age of 20 to 25. He made £150 a week until the age of 22, when he began to make £200 a week. However, his statutory redundancy would amount to £1,000.
- Carl has worked for the same company for 10 years, from the age of 50 to 60. He made £400 a week throughout this time. His statutory redundancy would amount to £6,000.
With these calculations, the minimum redundancy pay for an employee would be if an employee under 22 has been working for a company for the minimum requirement of two years. This minimum redundancy pay would equate to one week’s pay.
Many elements go into calculating an employee’s redundancy pay. This includes the prospect of raising alternatives to statutory redundancy. However, even those entitled to redundancy may lose it. Naturally the same is true for those fired due to gross misconduct.
For example, if an employer finds a suitable alternative job. If the employee turns it down, they’ll lose redundancies compensation. The same applies in the event an employee leaves their role before the redundancy date . This can occur for reasons like finding another job elsewhere.
Redundancy pay entitlement
In the event of redundancy, employees should receive statutory redundancy pay and any unpaid holiday days too. This is why employers must consider redundancy and holiday pay when deciding who to make redundant.
Company's holiday pay procedures calculate any redundancy holiday pay.
For example, a company offers employees 20 days of annual leave a year. They make an employee redundant halfway through the year, and the employee has used none of their holiday days. The company must pay 10 days of holiday wages to the employee, alongside any redundancy compensation.
For any furloughed employees because of the coronavirus pandemic, their redundancy pay is still based on their normal earnings.
For those made redundant on or after 6 April 2020, an employee’s weekly pay maximum is £538. This means that the maximum redundancy pay an employee can receive is £16,140.
For those made redundant before 6 April 2020, the amount of redundancy pay will be lower.
Redundancy notice pay also means that employees receive their usual wages for working their notice period. However, an employer may choose to pay the employee a lump sum to end their employment early, including their notice period as PILON (payment in lieu of notice).
There is also contractual redundancy pay, otherwise known as non-statutory redundancy pay. A much rarer alternative to statutory redundancy, contractual redundancy often pays a higher redundancy compensation. This only applies to those that have clauses addressing redundancy in their contracts.
If an employee’s contract of employment states that they have entitlement to a contractual redundancy, then they may receive much more than statutory redundancies. However, like redundancies over £30,000, these will be subject to income tax and National Insurance deductions.
Is redundancy pay taxed?
Redundancy pay is not taxable when it is under £30,000. This includes any severance pay. Any amount above this is susceptible to tax.
The employer is reasonable when calculating tax and National Insurance contributions from any wages. This includes any holiday pay owed to the employee.
Voluntary redundancy pay
An alternative to redundancy pay is voluntary redundancy pay. It offers employees an opportunity to take some control over a bad situation and provides them with a fair package.
BrightHR has more information about voluntary redundancy pay if needed.
HR-focused help with redundancies
Calculating redundancy compensation, even statutory redundancy pay, is clearly never a clear process. This is why BrightHR offers an easy to use redundancy navigator tool as well as a comprehensive resource centre, containing ample information about redundancies.
For any enquiries about redundancies and HR, get in touch today by calling 0800 470 2432.