Redundancy can be a stressful experience for both employers and employees, so it’s important to make the process as clear and straightforward as possible. This guide explains statutory redundancy pay, how it’s calculated, eligibility rules, tax treatment, and how to process redundancy payments correctly in PayFit.
Who is entitled to statutory redundancy pay?
Employees are entitled to statutory redundancy pay if:
They are classed as an employee (not a worker or contractor).
They have at least two years of continuous service.
Their role is genuinely redundant.
Continuous service includes:
Maternity, paternity, adoption, or shared parental leave
TUPE transfers (service carries over)
Only full years count, and statutory redundancy pay is capped at 20 years of service.
How statutory redundancy pay is calculated
The statutory calculation is based on age during each full year of service:
Under 22: half a week’s pay for each full year
22 to 40: one week’s pay for each full year
41 and over: one and a half week’s pay for each full year
Employees must have worked at least two years to be eligible.
Weekly pay cap for 2025/2026
The calculation is based on the lower of the employee’s actual weekly earnings or the statutory cap:
Great Britain: £719
Northern Ireland: £749
If the employee earns less than the cap, use their actual weekly pay. If they earn more, use the capped rate.
What counts as “a week’s pay”?
A week’s pay includes:
Basic salary
Regular overtime
Regular commission and performance-related earnings
It does not include:
One-off or discretionary bonuses
Benefits in kind
Tips
Variable-hours employees:
Use the average of the last 12 paid weeks to calculate weekly pay.
Tax and National Insurance rules
Statutory redundancy pay is tax-free up to £30,000.
It is not subject to National Insurance.
Any enhanced/occupational redundancy pay also counts toward the £30,000 exemption.
PILON, holiday pay, and bonuses are taxable and NIable.
Notice periods and other final payments
Employees may also be entitled to:
Statutory notice: 1 week per full year of service (max 12 weeks)
Contractual notice: if higher than statutory
Pay in lieu of notice (PILON)
Accrued holiday pay
Notice pay, PILON, and holiday pay are all subject to tax and NI.
How to terminate a contract in PayFit
To terminate a contract:
Go to the employee’s record and open the Employment tab.
Under the Contract section, click Terminate contract.
Select the reason for leaving. You’ll be asked for additional details such as the notice date or the final working day, depending on the reason selected.
Click Continue to termination payments.
Review the calculated termination payments.
If needed, click Overwrite amount to enter your own values.
For definitions and rules around each payment type, see the Termination payments section in the Help Centre.
Click Continue.
Under 3. Payment after leaving, choose whether the employee will receive any payments after termination.
For more details, see the Payments After Leaving Help Centre article.
If the employee uses their work email to log in, you can choose to send them a reminder to change it.
Click Save.
If they have recurring payments, deductions, or benefits, PayFit will prompt you to end these. Click Save again.
After refreshing your browser:
The employee will appear as Leaving this month.
A Contract termination section will be visible on their Employment tab.
Processing redundancy in payroll (PayFit)
Adding statutory or occupational redundancy pay
Statutory redundancy is automatically calculated in PayFit.
Occupational redundancy must be calculated and added manually.
Under Contract termination, select Add occupational redundancy amount if the employee is receiving any enhanced payment above the statutory amount.
PayFit will apply the correct tax and NI treatment automatically.
Additional Payments During Redundancy
When processing a redundancy, employees may also receive other termination payments alongside statutory or occupational redundancy pay. PayFit allows you to manage these payments and ensures the correct tax and NI treatment is applied.
Payment in Lieu of Notice (PILON)
Added if an employee is not working their contractual notice period
Can be calculated automatically by PayFit (if the employee contract and termination have been set up correctly) or manually overwritten if needed
Fully taxable and subject to National Insurance
Payment in Lieu of Holiday (PILOH)
Covers any unused or overtaken annual leave
PayFit calculates the correct payment automatically (if you are using PayFit to track annual leave and it is correct & up to date)
Can be manually adjusted if necessary
Fully taxable and subject to National Insurance
Ex-Gratia Payments
Discretionary payments made by the employer, with no contractual obligation
Often used to compensate for loss of employment or other discretionary reasons
Tax treatment:
First £30,000 is generally tax- and NI-free
Amounts above £30,000 are taxable for the employee and subject to Class 1A NIC
Any included contractual payments are fully taxable
Settlement Payments
Paid to settle potential claims against the employer
May relate to redundancy but can also cover other situations
Employees receiving a settlement agreement cannot take the employer to an employment tribunal
Tax treatment:
First £30,000 is generally tax- and NI-free
Amounts above £30,000 are taxable for the employee and subject to Class 1A NIC
Any included contractual payments or PILON are fully taxable
Tip: Always ensure additional payments are correctly categorised in PayFit to apply the correct tax and NI treatment.
Important: PayFit can process statutory redundancy payments as long as the employee’s contract and payroll setup are correct. However, we cannot provide support with termination calculations, due to the complexity and individuality of employee contracts, notice periods, and other entitlements. For guidance on occupational redundancy pay, eligibility, or employment rights, please consult a legal advisor or employment specialist.
Consultation requirements
Employers have a legal obligation to consult before confirming redundancies. The type of consultation depends on the number of roles affected. If you are unsure about your employer obligations, you should seek appropriate guidance.