How is Statutory Redundancy Pay Calculated?
If your business is considering making staff redundant? If so it’s important that you understand the costs involved. This blog provides a step-by-step guide to calculating redundancy pay.
The Origins of Redundancy Pay
The Redundancy Payments Act 1965 brought in the principle that, providing an employee qualified based on a length of service, he/she would be entitled to a payment from their employer should work be considered ‘unviable’ for the employer to continue with.
This was a policy shift by the Government at the time. It forced employers to carefully consider dismissals and share the state the burden and social responsibility of the cost and impact unemployment with the state.
However, the 1965 Act has long since been superseded and redundancy pay provisions now appear within the Employment Rights Act 1996. But the principle and intent are the same.
Also, the definition of redundancy has been refined.
The Statutory Redundancy Calculator
Currently an Employee only qualifies for statutory redundancy pay if they’ve worked for you for at least two years. The calculation is then based on age, weekly pay and number of years the employee has worked for your business.
The calculation is intended to ensure that older employees, who may have a long period of continuous service, would receive more. This is due to the disproportionate impact unemployment would have on that demographic when compared to younger workers.
You need to answer the following four questions to calculate the amount payable to an employee:
1. What date was the employee made redundant?
Use the dismissal date at the end of notice, otherwise the dismissal date in lieu of notice. Employees made redundant after trialling a new job will revert back to the last day of their original job ending.
2. How many years has the employee worked for you?
Only count full years of service. Part years are rounded down. Length of service is capped at 20 years.
3. How old was the employee on the date he or she was made redundant?
- 0.5 week’s pay for each full year worked when they’re under 22 years old
- 1 week’s pay for each full year worked when they’re between age 22 and age 41
- 1.5 week’s pay for each full year worked when they’re age 41 or older
4. What is the employee’s weekly pay before tax and any other deductions?
Weekly pay is currently capped at £525 (£547 in Northern Ireland) per week. The cap is increased each year in line with inflation.
As length of service over 20 years and earnings over the current weekly limit are disregarded, the total maximum amount of statutory redundancy pay an employee could receive is currently £15,750 (£16,410 in Northern Ireland).
Enhanced/contractual redundancy scheme
However, employees may be entitled to more than the statutory amount if you provide an enhanced redundancy scheme. Such a scheme may be used to encourage voluntary redundancies.
Redundancy pay up to £30,000 is tax-free.
Moorepay customers who would like any specific advice on redundancy pay should contact the Advice Line on 0345 073 0240.
Even if you’re not a Moorepay customer, you can find out more about our HR & Employment Law Advice Service.