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The Office for National Statistics recorded 113,000 redundancies in its latest three-month estimate, a rate of 3.8 per 1,000 employees [1]. For anyone dismissed on or after 6 April 2026, statutory redundancy pay is capped at £22,530, because a week's pay is capped at £751 and service at 20 years [2].
Many employers pay more than that legal minimum. Acas describes any top-up above the statutory amount as enhanced or contractual redundancy pay [3], and government guidance confirms that an employer can give extra redundancy pay or use a qualifying period shorter than 2 years [4].
An enhanced scheme raises three questions at once: how to design the formula without breaching age discrimination law, how much of the payment is taxable, and how payroll should report it. This article takes each in turn, with a worked example recomputed for the 2026-27 tax year, and closes with the employment law changes that alter redundancy costs over the next few months.
Key takeaways
- Enhanced redundancy pay is any amount above the statutory minimum, which is capped at £22,530 for dismissals on or after 6 April 2026 [2].
- An enhanced scheme that follows the statutory age-and-service formula, with a higher or removed weekly cap or a multiplier, is protected from age discrimination claims under the Equality Act 2010.
- Statutory and enhanced redundancy pay share one £30,000 tax-free threshold, aggregated across the same employer and associated employers.
- The employer pays Class 1A National Insurance at 15% on the amount above £30,000, and the employee pays no Class 1 National Insurance on it.
- Where notice is not worked, part of the enhanced payment may be post-employment notice pay, which is fully taxable and never benefits from the £30,000 threshold.
- A payment made after the P45 is taxed on code 0T on a month 1 or week 1 basis and reported on the next FPS with the payment-after-leaving indicator.
What enhanced redundancy pay is
Statutory redundancy pay is the floor set by the Employment Rights Act 1996. An employee with at least 2 years of service receives half a week's pay for each full year under 22, one week's pay for each full year from 22 to 40, and one and a half weeks' pay for each full year at 41 or older [2]. The calculation itself sits in section 162 of the Act [5].
Statutory minimum versus enhanced scheme
Enhanced redundancy pay is any amount an employer pays above that statutory sum, whether set by contract, by a collective agreement, by a written policy or by a one-off decision [3]. The employer must still give the employee a written statement of the amount and how it was worked out [4].
The table below compares the statutory minimum with the levers an enhanced scheme commonly changes [2].
| Element | Statutory redundancy pay | Typical enhanced scheme |
|---|---|---|
| Qualifying service | 2 years | Can be shorter, such as 1 year |
| Weekly pay cap | £751 | Raised or removed |
| Weeks per year of service | 0.5, 1 or 1.5 by age band | Statutory bands multiplied, or a flat number of weeks |
| Maximum service counted | 20 years | Can be extended |
| Maximum payment | £22,530 | Set by the scheme |
Contractual and discretionary schemes
The distinction between a contractual entitlement and a discretionary payment matters most when a dispute arises. Acas sets a tribunal time limit of 6 months minus 1 day for a statutory redundancy pay claim, and 3 months minus 1 day for a contractual redundancy pay claim [3]. The government's Employment Rights Act timeline records that the employment tribunal time limit rose from 3 to 6 months from 1 October 2026, so employers should check which limit applies to each claim [6].
Where a scheme is written into contracts, the employee can enforce it as a debt. Where it is discretionary, the employer can change it for each exercise, but must still apply it consistently and record the basis used [4]. Voluntary redundancy programmes often rely on a discretionary enhancement to attract volunteers, and the government guidance on non-compulsory redundancy covers how those offers are made [7].
Designing a scheme that survives an age discrimination challenge
Because the statutory formula pays older employees more per year of service, any scheme that copies it treats people differently by age. The Equality Act 2010 deals with this directly.
The Schedule 9 safe harbour
Paragraph 13 of Schedule 9 to the Equality Act 2010 states that it is not an age contravention to give one qualifying employee a smaller enhanced redundancy payment than another, if each amount is calculated on the same basis [8]. An enhanced redundancy payment for this purpose is one calculated in accordance with section 162(1) to (3) of the Employment Rights Act 1996, subject to permitted variations [5].
The permitted variations are specific. The scheme may disregard the statutory maximum weekly pay, use a higher maximum, multiply the amount for each year of service by a figure above one, or multiply the total by a figure above one [8]. The safe harbour covers employees who would qualify for statutory redundancy pay, which normally means 2 years of continuous service [2].
| Scheme design | Inside the Schedule 9 safe harbour | Comment |
|---|---|---|
| Statutory formula with actual weekly pay, no cap | Yes | Paragraph 13(5)(a) |
| Statutory formula with a higher cap | Yes | Paragraph 13(5)(b) |
| Statutory formula with each year multiplied | Yes | Paragraph 13(5)(c) |
| Statutory total multiplied by a figure | Yes | Paragraph 13(6) |
| Flat weeks per year regardless of age | Not age-based, so no age safe harbour needed | Treats all ages alike per year |
| Extra payment for staff over a set age | No | Needs objective justification |
Schemes outside the safe harbour
A scheme that steps outside these variations is not automatically unlawful, but it loses the statutory protection and the employer must be ready to justify the age-related difference [8]. Paying the scheme to employees with under 2 years of service is a common example, because the safe harbour is tied to those who would qualify for a statutory payment [4].
Caps on total payments and service limits interact with age too, since longer-serving staff tend to be older. Employers designing a scheme for a large exercise often run the formula across the whole affected workforce before fixing it, using the official statutory redundancy pay figures as the baseline and the government's calculator as a check [9].
How enhanced redundancy pay is taxed
Statutory redundancy pay and enhanced redundancy pay are taxed together, not separately. The employee does not usually pay tax on the first combined £30,000 of statutory redundancy pay, additional severance or enhanced redundancy payments and non-cash benefits [10].
The single £30,000 threshold
Termination payments are taxable only to the extent that they exceed £30,000, a rule that applies from 6 April 2018 [11]. HMRC requires all such payments and benefits connected with the same employment, with different employments under the same employer, or with associated employers, to be added together, so that only one £30,000 threshold applies to the total [12].
Statutory redundancy pay itself is exempt as earnings, falls within section 401 of the Income Tax (Earnings and Pensions) Act 2003 and benefits from the £30,000 threshold [13]. For an approved contractual payment, the part equal to the statutory amount is exempt in the same way, and any excess is a relevant termination award for post-employment notice pay purposes [13]. The question of what counts as taxable is covered in more depth in the Moonworkers guide on whether redundancy pay is taxable.
Post-employment notice pay
Enhanced pay interacts with notice. If the employee does not work the full notice period, part of any severance, enhanced redundancy or non-cash benefits is treated as post-employment notice pay, known as PENP, and is fully taxable [10]. PENP does not apply to statutory redundancy pay, and the £30,000 threshold does not apply to PENP [11].
HMRC sets the formula as ((BP × D) ÷ P) − T, where BP is basic pay for the last pay period before the trigger date, D is the number of calendar days in the post-employment notice period, P is the number of calendar days in that last pay period and T is any other chargeable termination payment, such as a contractual payment in lieu of notice [14]. A negative result counts as nil, and for staff paid in 12 equal monthly instalments, P can be replaced by 30.42 where D is not a whole number of months [15].
The employer must calculate PENP whether or not the employee receives a contractual or non-contractual payment in lieu of notice [16]. The government's own illustrations show the effect.
| HMRC illustration | Statutory redundancy | Severance | Unworked notice | Weekly basic pay | Taxable as PENP |
|---|---|---|---|---|---|
| Case 1 | £10,000 | £5,000 | 4 weeks | £500 | £2,000 |
| Case 2 | £10,000 | £3,000 | 4 weeks | £1,000 | £3,000, capped at the severance paid |
In the second case the formula gives £4,000, but PENP cannot exceed the severance actually received, so only £3,000 is chargeable [10]. The Moonworkers guide to payment in lieu of notice explains the notice side in more detail.
Pension contributions as part of the package
Contributions the employer makes to a registered pension scheme as part of a termination payment are not taxed or subject to National Insurance, although tax applies to employer contributions above the Annual Allowance [10]. Routing part of an enhanced payment above £30,000 into a pension can therefore reduce the taxable excess, and the government's MoneyHelper service sets out the pension options for someone made redundant [17].
National Insurance on enhanced redundancy pay
National Insurance treatment differs for each side of the payment. The employee pays no Class 1 National Insurance on a redundancy payment, and payroll guidance says to deduct National Insurance on payments after leaving unless it is a redundancy payment [18].
Class 1A on the excess over £30,000
The employer pays Class 1A National Insurance on any amount over the combined £30,000 [10]. HMRC's manual confirms that, from April 2020, termination awards charged to income tax under section 403 are subject to Class 1A on the amount in excess of £30,000, where the payment and the termination both fall after 5 April 2020 [19].
The Class 1A rate matches the 15% employer Class 1 rate [20]. PENP is different: because it is treated as earnings, it attracts Class 1 National Insurance for both employer and employee, as the payment in lieu of notice it replaces would [10]. The table below sets out the treatment of each element [19].
| Element of the package | Income tax | Employee NI | Employer NI |
|---|---|---|---|
| Statutory and enhanced redundancy pay up to £30,000 combined | None | None | None |
| Redundancy pay above £30,000 | Yes | None | Class 1A at 15% |
| Post-employment notice pay | Yes, in full | Class 1 | Class 1 |
| Holiday pay, unpaid wages, bonuses | Yes | Class 1 | Class 1 |
| Employer pension contribution within the Annual Allowance | None | None | None |
A worked example for the 2026-27 tax year
An employee aged 51 has 10 complete years of service, all from age 41, and earns £52,000 a year, a week's pay of £1,000. The employer's enhanced scheme uses the statutory formula with actual weekly pay and multiplies the total by 2.5, a design inside the Schedule 9 safe harbour [8]. The employee works the full notice period, so no PENP arises [16].
Calculating the payment
Ten years at one and a half weeks each gives 15 weeks [2]. At the statutory cap of £751, the statutory redundancy payment is £11,265 [9]. The enhanced scheme pays 15 weeks at the uncapped £1,000, multiplied by 2.5, giving £37,500 in total, of which £11,265 is the statutory element and £26,235 the enhancement [8].
The combined payment exceeds the £30,000 threshold by £7,500, which is the taxable excess [10]. The employer's Class 1A liability on that excess is £1,125, at the 15% rate [19].
Running it through payroll
If the redundancy payment is made after the P45 has been issued, payroll uses code 0T on a month 1 or week 1 basis, S0T or C0T for Scottish and Welsh taxpayers, and reports it on the next FPS with the original leaving date and the payment-after-leaving indicator [18]. On the £7,500 taxable excess paid on 0T month 1, the income tax deducted is £2,371.66, and no employee National Insurance is taken [18].
That deduction is provisional. The employee's final income tax depends on total income for the tax year, so the amount actually due may be higher or lower and is settled at the end of the year [21]. Running this calculation reliably for every leaver is where SME payroll software that holds HMRC Recognised status earns its keep, because the FPS indicators and the Class 1A reporting must match the payment exactly.
| Stage | Amount |
|---|---|
| Statutory redundancy pay, 15 weeks at £751 | £11,265 |
| Enhancement | £26,235 |
| Total redundancy payment | £37,500 |
| Covered by the £30,000 threshold | £30,000 |
| Taxable excess | £7,500 |
| Income tax deducted on 0T month 1 | £2,371.66 |
| Employer Class 1A at 15% | £1,125 |
Process and legal changes that affect redundancy costs
An enhanced scheme sits inside the wider redundancy process, and several deadlines apply whatever the amount paid.
Consultation, notification and alternatives
Where 20 or more redundancies are proposed at one establishment within 90 days, the employer must consult collectively for at least 30 days, or 45 days for 100 or more [22]. It must also notify the Redundancy Payments Service in advance on form HR1 [23], and the Moonworkers guide to the redundancy consultation period covers both duties.
An employee offered suitable alternative work has the right to a 4-week trial period, and loses statutory redundancy pay only by failing to give notice within that trial [24]. Enhanced schemes usually mirror this rule, although the scheme wording decides it. Redundancy pay is also separate from notice pay, which the employer owes in addition [25].
Settlement agreements
Enhanced packages are often offered in return for a settlement agreement waiving claims. For the agreement to be legally valid, it must relate to a specific complaint or claim, the worker must take advice from a relevant independent adviser who is insured, and the agreement must name the adviser [26]. Acas also notes there is no legal right to be accompanied to a settlement agreement meeting [27].
Compensation paid under a settlement shares the same £30,000 threshold as the redundancy pay, because HMRC aggregates all section 401 payments for the employment [12]. Unfair dismissal compensation, for example, is taxed under section 401 and counts towards the same total [28].
Employment Rights Act changes
The government's timeline shows that the maximum period of the collective redundancy protective award doubled from 6 April 2026 [6]. From 1 January 2027 the unfair dismissal qualifying period falls to 6 months and the compensatory award is uncapped, fire and rehire protections follow in March 2027, and an organisation-wide collective redundancy threshold is due in April 2027 [6].
Each change raises the cost of a flawed process, which in turn raises the value of an enhanced package paired with a valid settlement agreement [26]. Groups running exercises across several entities can use enterprise payroll tooling to apply one £30,000 threshold across associated employers, and bureaux handling leavers for many clients rely on a payroll bureau platform for the same aggregation [12]. Platforms building termination workflows into their own products can call the same logic through a UK payroll engine.
Model the salary side of a leaver's final pay
Final pay usually combines ordinary salary, holiday pay and notice pay alongside any redundancy payment. The Moonworkers UK salary calculator applies the 2026-27 PAYE and National Insurance rules to the earnings element, so the taxable part of a leaver's last payslip can be reviewed before the payment is made.
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About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category. If in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
Enhanced redundancy pay is generous by design, but it is not free of structure. The Equality Act safe harbour rewards schemes that stay close to the statutory formula, the tax rules pool every termination payment under a single £30,000 threshold, and post-employment notice pay pulls part of the enhancement back into full taxation whenever notice goes unworked. The employer's Class 1A charge on the excess is the cost most often missed in budgeting.
The coming changes to unfair dismissal, fire and rehire and collective consultation will make the process around redundancy more expensive to get wrong. Employers revisiting their schemes now are likely to find that the formula, the settlement terms and the payroll treatment need to be designed together rather than one after another.
Frequently asked questions
Is enhanced redundancy pay tax free?
Up to a point. Statutory and enhanced redundancy pay, together with other qualifying termination payments, share a single £30,000 tax-free threshold, and anything above it is taxable. Any part treated as post-employment notice pay is taxable in full and does not benefit from the threshold [10] [11].
Does an employer pay National Insurance on enhanced redundancy pay?
Only on the part above £30,000. The employer pays Class 1A National Insurance at the 15% employer rate on the excess, while the employee pays no Class 1 National Insurance on the redundancy payment itself [19] [18].
Can an enhanced redundancy scheme pay older workers more?
Yes, if it follows the statutory formula. The Equality Act 2010 protects schemes that use the statutory age bands and either remove or raise the weekly pay cap, or apply a multiplier to each year or to the total. A scheme that adds a separate age-based bonus falls outside that protection and needs objective justification [8] [5].
How much is the maximum statutory redundancy pay?
For dismissals on or after 6 April 2026, a week's pay is capped at £751 and service at 20 years, giving a maximum statutory payment of £22,530. Enhanced schemes can pay above this limit, and the employer must give a written statement showing how the payment was calculated [2] [4].
