How does contractual redundancy pay work in the UK work?

Every employment contract should explain what happens if a role becomes redundant. In practice, redundancy pay can be a mix of:

• statutory redundancy pay (the legal minimum), and

• contractual redundancy pay (an enhanced amount your employer offers through the contract, a policy, or a settlement).

Because the rules involve notice, service length, age, tax treatment, and sometimes a different calculation method for directors or variable pay, it’s easy for a business (or an employee) to miss a detail.

Let’s break it down with practical advice, a clear table, and an example you can adapt to your own situation.

What is contractual redundancy pay?

Contractual redundancy pay is redundancy compensation that goes beyond the legal minimum because it’s set out in:

• the employment contract (common in more senior roles),

• a company redundancy policy (often used across a whole business), or

• a written agreement reached at the time of redundancy.
  

It’s sometimes called enhanced redundancy pay, because it enhances the statutory position (e.g. more weeks of pay per year of service, a higher weekly pay reference, or paying people who wouldn’t otherwise qualify for statutory redundancy).

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💡Good to know: Contractual redundancy terms are often linked to length of service, but they can also factor in grade, salary bands, or a standard company formula. When a business grows quickly, consistency matters: applying the same rule across the workforce helps reduce disputes and protects the organisation if someone later claims unfair treatment.

Are you entitled to redundancy pay?

Statutory redundancy pay entitlement

You’re normally entitled to statutory redundancy pay if:

• you are an employee (not genuinely self-employed),

• you’ve worked continuously for your employer for at least 2 years, and

• you’re being dismissed because your role is genuinely redundant.

The statutory calculation also depends on age and length of service, using a set number of weeks per year worked. 

Contractual redundancy pay entitlement

You’re entitled to contractual redundancy pay if your contract (or a policy incorporated into it) provides for it, or if the employer has made a clear written offer that forms part of the redundancy process.

A good check: look for wording like “enhanced redundancy pay”, “company redundancy scheme”, or a section that explains redundancy payments and how they’re calculated.

How is redundancy pay calculated?

How is statutory redundancy pay calculated?

Statutory redundancy pay is based on:

• your age during each year of service,

• your total continuous service (up to the statutory maximum), and

• a capped “week’s pay” figure used for the calculation.

The government also sets a maximum total statutory redundancy payment. 

How is contractual redundancy pay calculated?

Contractual redundancy pay usually builds on statutory redundancy pay in one (or more) of these ways:

• More weeks of pay per year of service (for example, a flat 2 weeks per year instead of the statutory age-based scale)

• A higher “week’s pay” reference (for example, using actual weekly salary rather than the statutory cap)

• Wider eligibility (for example, paying people with under 2 years’ service)

• Additional payments for certain groups (e.g. long service awards, fixed sums, or pay protection)

This is where wording matters: the contract may specify the method (how you work it out), but also the process (who approves it, what evidence is needed, and the date the calculation is locked in).

Statutory vs contractual redundancy pay at a glance

How do tax and National Insurance work for contractual redundancy pay?

This is the part that often catches businesses out.

Is redundancy pay tax-free?

Some termination payments can be tax-free up to £30,000, depending on what they represent (and whether they fall within the relevant rules).
However, other amounts paid when employment ends, especially notice pay or amounts treated as earnings, can be taxed differently. 

Do employers pay National Insurance on redundancy payments?

Since April 2020, employers may have to pay Class 1A National Insurance contributions on the part of a termination award above £30,000, where it’s taxed as a termination payment and not already subject to Class 1 NICs as earnings. 

If you’re a business running redundancy payments, it’s worth having payroll process steps that separate:

• contractual redundancy pay,

• statutory redundancy pay, and

• pay in lieu of notice (and other earnings),
  so that tax/NIC treatment is applied correctly.

What notice, evidence and process should you follow?

What notice should employees give (and what notice must employers give)?

Redundancy is still a dismissal, so notice rules apply. Your employment contract will usually set out contractual notice, and statutory notice may apply as a minimum. This is also where many disputes start: people confuse redundancy pay with notice pay, even though they’re different payments.

What evidence do you need to keep to avoid disputes?

A good redundancy file normally includes:

• the redundancy rationale (why the role is redundant),

• the selection approach (who was involved, what criteria were used),

• the calculation breakdown (including the period and the relevant date), and

• the written offer confirming any contractual enhancement.
  

If things go wrong, this is what you’ll want to show an adviser, an expert, or (in the worst case) an employment tribunal.

Worked example: statutory vs contractual redundancy pay

The point isn’t the exact number (statutory depends on the age bands and capped weekly figure); it’s that contractual pay can be materially higher, and the wording of the scheme determines what someone is entitled to receive.

How to handle terminations better with payroll software?

A payroll software makes calculating payments for base pay and annual leave a cinch. On top of this, it can automate PILON and statutory redundancy calculations. 

Termination payments and the associated tax and NIC treatment can also be dealt with swiftly by selecting the reason for an employee leaving.

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