Contractual redundancy pay is an enhanced payment your employer has agreed to make on top of the statutory minimum when your role is made redundant. It comes from your contract, staff handbook, a collective agreement, or long-standing custom, and the amount depends on those terms rather than the government formula. The first £30,000 of a genuine redundancy payment is free from income tax, and statutory redundancy pay for redundancies on or after 6 April 2026 is capped at £22,530 based on a weekly pay ceiling of £751.1GOV.UK. Redundancy: Your Rights – Redundancy Pay Contractual schemes routinely exceed that cap, sometimes by a wide margin.
How It Differs From the Statutory Minimum
Statutory redundancy pay is the legal floor every qualifying employee receives under the Employment Rights Act 1996 when dismissed by reason of redundancy.2Legislation.gov.uk. Employment Rights Act 1996 – Section 135 The formula uses three age bands applied to your length of service, capped at 20 years:
- Under 22: half a week’s pay for each full year of service
- 22 to 40: one week’s pay for each full year
- 41 or older: one and a half weeks’ pay for each full year
Weekly pay for this calculation is capped at £751 for redundancies on or after 6 April 2026, producing a maximum statutory payout of £22,530.1GOV.UK. Redundancy: Your Rights – Redundancy Pay
A contractual scheme sits on top of that floor. It can never pay less than the statutory amount, but it can remove the weekly pay cap, increase the multiplier per year of service, or ignore the age bands entirely. Your agreement dictates what you receive.
Where the Right Comes From
The clearest source is a written clause in your employment contract, often in the original offer letter or a later variation. Look for language such as “enhanced redundancy,” “company redundancy scheme,” or a specific formula tied to salary and service.
Staff handbooks and internal policy documents are just as common. Whether a handbook creates a binding entitlement depends on how it is worded and whether your contract incorporates it by reference. A handbook that says “the company will pay” reads very differently from one that says “the company may, at its discretion, pay.” That single word changes whether you have a right or merely a hope.
In unionised workplaces, collective bargaining agreements frequently establish enhanced terms covering entire groups of employees, and those terms typically bind the employer for the duration of the agreement.
Rights can also arise through custom and practice where an employer has consistently paid the same enhanced rate over a long period. For this to create an implied contractual term, the practice must be well-known within the business, reasonable, and sufficiently certain in its terms.3Acas. Custom and Practice – Employment Contracts and the Law A handful of isolated instances is unlikely to be enough; years of consistent application across multiple rounds of redundancy make a stronger case.
Can Your Employer Change or Withdraw the Scheme?
If enhanced redundancy pay is a contractual term, your employer cannot unilaterally reduce or withdraw it without your agreement. Doing so would be a breach of contract. Employers who want to change an established scheme usually consult with affected employees or their union and seek agreement to the new terms. Where the scheme sits in a discretionary policy rather than a binding contract, the employer has more room to amend it, though even discretionary decisions must be exercised genuinely and not irrationally.
Who Qualifies
Statutory redundancy pay requires two years of continuous service with the same employer.4Acas. Redundancy Pay – Your Rights During Redundancy Many contractual schemes mirror this threshold; some set a shorter or longer qualifying period. Check your specific contract rather than assuming.
The dismissal must be a genuine redundancy. Under the Employment Rights Act 1996, that means the employer’s business is closing, the workplace where you are employed is closing, or the need for employees to carry out work of a particular kind has ceased or diminished.5Legislation.gov.uk. Employment Rights Act 1996 – Section 139 Dismissal for misconduct or poor performance does not qualify, whatever your contract says.
Voluntary Redundancy
When an employer opens a voluntary redundancy programme, employees who put themselves forward generally retain the same statutory rights as those selected compulsorily. Whether you also receive the full contractual enhancement depends on the terms of the voluntary scheme. Some employers offer identical or better rates to attract volunteers; others set separate terms. Read the offer carefully before accepting.
Suitable Alternative Employment
If your employer offers you a suitable alternative role and you unreasonably refuse it, you risk losing your right to redundancy pay entirely. You have a right to a four-week trial period in any alternative role. If it turns out to be genuinely unsuitable during that trial, you can leave without giving additional notice and your redundancy entitlement is preserved. A longer trial can be agreed in writing if you need time to train. Stay beyond the trial without raising concerns and you are treated as having accepted the role, so your redundancy rights fall away.6Acas. Suitable Alternative Employment – Your Rights During Redundancy
If you think the role is not suitable, put your reasons in writing. Whether refusal is reasonable turns on factors like pay, status, location, and how different the work is from your current job. A mobility clause in your contract can complicate matters if the new role is in a different location.
How Contractual Schemes Calculate the Payment
Schemes vary widely, but most take one of three approaches.
The simplest is a multiplier applied to the statutory formula. An employer might offer double or triple the statutory amount, keeping the age-banded structure but producing a larger payout. It is easy to calculate and transparent.
A second approach removes the statutory caps altogether. Instead of the £751 weekly ceiling and age-related multipliers, the employer pays a flat number of weeks per year of service based on your actual gross weekly salary. Two weeks’ pay per year of service for someone earning £70,000 a year with ten years of service produces roughly £26,900, well above the statutory maximum. At three weeks per year, the same employee would receive around £40,400.
The third method ignores length of service entirely and ties the payout to a percentage of annual salary. A senior manager might receive six months’ base salary regardless of tenure. This is more common in executive contracts.
Statutory calculations use average weekly pay over the 12 weeks before the redundancy notice date, capped at £751.1GOV.UK. Redundancy: Your Rights – Redundancy Pay Contractual schemes often use actual gross salary and may include regular bonuses or commission, which pushes the payout higher. Check whether your contract defines “week’s pay” or defaults to the statutory meaning.
How Redundancy Pay Is Taxed
The first £30,000 of a genuine redundancy payment is free from income tax. The exemption comes from section 403 of the Income Tax (Earnings and Pensions) Act 2003, which treats any amount up to £30,000 as exempt and taxes only the excess as employment income.7Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 403 The threshold applies to the total of all qualifying redundancy payments from the same employment, not to each individual component.
Statutory redundancy pay under £30,000 is not taxable, and for most employees the statutory amount sits well within the threshold.8GOV.UK. Redundancy: Your Rights – Tax and National Insurance Contractual enhancements eat into the £30,000 allowance and can exceed it. Anything above is taxed at your normal income tax rate.
What Doesn’t Qualify for the Tax-Free Slice
Not everything in your termination package counts toward the £30,000. Holiday pay, unpaid wages, and bonuses are taxed as normal earnings because they are pay you have already earned. Since April 2018, all payments in lieu of notice are also subject to income tax and National Insurance, whether or not your contract contains a PILON clause.9GOV.UK. Changes to the Treatment of Termination Payments and Post-Employment Notice Pay for Income Tax Before 2018, a contractual PILON clause could sometimes be structured to fall within the exemption; that route is now closed.
National Insurance on the Excess
Since April 2020, employers pay Class 1A National Insurance contributions on the portion of a termination payment above £30,000. Employees do not pay any employee National Insurance on redundancy payments, even on amounts above the threshold.10GOV.UK. Class 1A NICs on Termination Awards: Introduction The employer bears the NICs cost on the excess, not you.
If Your Employer Refuses to Pay
When an employer fails to honour a contractual scheme, you have a breach of contract claim. Raise a grievance through the internal process first; many disputes settle here, particularly where the terms are clear. If that fails, Acas early conciliation is a required step before issuing an employment tribunal claim.
The employment tribunal can hear breach of contract claims arising from termination, but recovery is capped at £25,000. Statutory redundancy pay does not count toward that cap because it is a separate statutory entitlement. If your contractual payment exceeds £25,000, you would need to bring the claim in the county court or High Court to recover the full amount.
You may also be asked to sign a settlement agreement in exchange for the redundancy package and any additional compensation. To be legally valid, the agreement must be in writing, relate to specific claims, and be signed after you have received advice from a relevant independent adviser who holds insurance and is named in the agreement.11Acas. Using Settlement Agreements Employers usually contribute toward the cost of that advice. Skipping the step is not an option; the agreement is void without it.
If your employer becomes insolvent before paying, you can apply to the Redundancy Payments Service for the statutory element. The contractual enhancement above the statutory amount would be an unsecured debt in the insolvency, so recovery depends on whether funds exist to pay creditors.