Severance Pay in the UK 2026: What You Need to Know

Severance pay in the UK is one of the most misunderstood areas of employment law for international employers. Unlike many countries that have a single statutory severance formula, the UK system is layered. What employees commonly call “severance pay” is actually a combination of several separate entitlements: statutory redundancy pay, contractual or enhanced redundancy pay, notice pay (or payment in lieu of notice), accrued but untaken holiday pay, and potentially an ex-gratia settlement payment negotiated as part of a settlement agreement.

Understanding severance pay in the UK requires knowing which of these components are legally required, which are contractual, and which are negotiated. The amounts involved can range from a few hundred pounds for a short-tenured junior employee to six figures or more for a senior executive departing under a settlement agreement. The tax treatment is different for each component, and getting it wrong creates exposure for both employer and employee.

For international companies hiring in the UK through an Employer of Record, severance is where EOR quality is most visibly tested. Calculating statutory redundancy correctly, structuring settlement agreements compliantly, managing tax treatment across multiple payment types, and handling the offboarding process within employment tribunal time limits requires real UK employment law expertise, not a generic global template.

This guide covers the full severance pay framework as it applies from 6 April 2026, including the latest statutory rate increases.

Statutory redundancy pay is the minimum amount an employer must pay when making an employee redundant. It is governed by the Employment Rights Act 1996 and applies to employees who have at least 2 years of continuous service with the same employer. It is not discretionary. If the employee qualifies and the dismissal is by reason of redundancy, the employer must pay it.

To qualify for statutory redundancy pay, the employee must be an employee (not a worker or contractor), have at least 2 years of continuous service, and have been dismissed by reason of redundancy. Redundancy occurs when the employer’s need for employees to carry out work of a particular kind has ceased or diminished, the business is closing, or the workplace where the employee was employed is closing.

The calculation is based on three factors: the employee’s age, length of continuous service (capped at 20 years), and weekly pay (capped at a statutory maximum that changes each April).

From 6 April 2026, the statutory redundancy pay rates are: half a week’s pay for each full year of service while the employee was under 22, one week’s pay for each full year of service while the employee was aged 22 to 40, and one and a half weeks’ pay for each full year of service while the employee was 41 or older.

The weekly pay cap from 6 April 2026 is £751 (up from £719). The maximum total statutory redundancy payment is £22,530 (20 years x £751 x 1.5). Even if the employee earns more than £751 per week, the statutory calculation is capped at that amount.

Weekly pay is calculated as the average over the 12 weeks before the employee received their redundancy notice. It includes basic pay, guaranteed overtime, and contractual bonuses or commission. It does not include discretionary bonuses, tips, or benefits in kind.

Many employers offer redundancy pay above the statutory minimum. This is called enhanced or contractual redundancy pay and is typically set out in the employment contract, company handbook, or a specific redundancy policy. Enhanced redundancy is not required by law, but once it is included in a contract or established as a consistent practice, it can become a contractual entitlement that the employer cannot unilaterally withdraw.

Common enhanced redundancy formulas include a flat multiplier above statutory (for example, actual weekly pay instead of the capped amount), additional weeks per year of service, or a fixed payment per year of service regardless of age. Some employers offer particularly generous schemes to encourage voluntary redundancy, where the enhanced payment is contingent on the employee agreeing to leave voluntarily rather than being selected through a compulsory process.

Enhanced redundancy pay above the statutory minimum is treated differently for tax purposes (covered later in this guide).

Separately from redundancy pay, employees are entitled to notice of termination. UK law provides statutory minimum notice periods: one week for each year of continuous service, with a minimum of one week (after one month of service) and a maximum of 12 weeks (after 12 or more years of service).

Many employment contracts provide for longer contractual notice periods than the statutory minimum, particularly for senior roles. Three months’ contractual notice is common for professional and managerial positions. Some executive contracts specify six months or more.

If the employer wants the employee to leave immediately rather than working their notice, they can make a payment in lieu of notice (PILON). If the contract contains a PILON clause, this payment is treated as earnings and is subject to income tax and National Insurance in full. If there is no PILON clause in the contract, the first £30,000 of the termination payment (including notice pay) may be tax-free, though this area is complex and HMRC scrutinises it closely.

The interaction between statutory notice, contractual notice, and redundancy pay is important. If an employee is paid in lieu of statutory notice, the statutory notice period is added to their length of service for the purpose of calculating redundancy pay. This can push an employee into an additional year of service and increase the redundancy payment.

A settlement agreement (formerly called a compromise agreement) is a legally binding contract between employer and employee that ends the employment relationship on agreed terms. The employee agrees to waive their right to bring specified claims (typically unfair dismissal, discrimination, breach of contract, and other employment law claims) in exchange for a financial payment and other agreed terms.

Settlement agreements are voluntary. Neither party is obliged to enter into one, and the employee cannot be pressured or threatened into signing. Under Section 111A of the Employment Rights Act 1996, employers can initiate “protected conversations” about settlement without those discussions being admissible in an unfair dismissal claim, provided there is no “improper behaviour.” However, this protection does not extend to discrimination claims, whistleblowing claims, or automatically unfair dismissal claims.

For a settlement agreement to be legally valid, the employee must receive independent legal advice from a qualified adviser (typically a solicitor), the agreement must be in writing, the agreement must identify the specific claims being settled, and the adviser must be covered by professional indemnity insurance. The employer typically contributes £350 to £500 or more toward the employee’s legal fees for obtaining this advice.

Settlement agreements commonly include statutory redundancy pay (if applicable), an ex-gratia or compensation payment (the negotiated element), payment in lieu of notice, accrued but untaken holiday pay, an agreed reference, confidentiality clauses, and a waiver of claims.

The ex-gratia element is where negotiation occurs and where the total severance payment can significantly exceed the statutory minimum. The amount depends on the strength of any potential claims the employee might have, the employer’s commercial interest in a clean exit, the employee’s length of service and seniority, and whether the employer is seeking to avoid the time and cost of a formal process.

The tax treatment of severance pay in the UK depends on the type of payment. Getting this wrong creates liability for both employer and employee, and HMRC actively audits severance payments.

Statutory redundancy pay is tax-free, regardless of amount, up to the statutory maximum of £22,530. The first £30,000 of any termination payment that is genuinely compensation for loss of employment (including enhanced redundancy pay and ex-gratia payments) is also tax-free. This £30,000 exemption includes the statutory redundancy pay within it, not on top of it. For example, if an employee receives £22,530 in statutory redundancy pay and £10,000 in enhanced redundancy, only £7,470 of the enhanced payment is tax-free (bringing the total to £30,000), and the remaining £2,530 is taxable.

Any termination payment above £30,000 is subject to income tax (but not employee National Insurance). Since April 2020, employer National Insurance contributions are payable on termination payments above £30,000.

Notice pay, whether worked or paid in lieu, is fully taxable as earnings and subject to both income tax and National Insurance. If the contract contains a PILON clause, this is straightforward. If there is no PILON clause, the “post-employment notice pay” (PENP) rules require the employer to calculate what the employee would have earned during their notice period and treat that amount as taxable earnings, regardless of how the payment is labelled in the settlement agreement.

Accrued holiday pay is fully taxable as earnings. Payments toward the employee’s legal fees for obtaining advice on a settlement agreement are not taxable if paid directly to the solicitor (up to a reasonable amount).

An often overlooked aspect of severance pay in the UK is how working time affects the calculation. Under the Working Time Regulations 1998, employees are entitled to a minimum of 5.6 weeks of paid annual leave per year. Any accrued but untaken statutory leave must be paid out on termination, and this payment is fully taxable. For employees who work irregular hours or who are on zero-hours contracts, calculating the correct holiday accrual and payout requires careful attention to the reference period and average hours worked.

Overtime patterns also affect the weekly pay calculation for statutory redundancy. If the employee regularly works guaranteed overtime that is included in their contract, this must be included in their weekly pay figure for redundancy purposes. Discretionary or voluntary overtime is excluded. Getting this distinction wrong is one of the most common errors in redundancy pay calculations.

While the national minimum wage does not directly determine severance pay amounts, it is relevant in two contexts. First, any notice pay or payment in lieu of notice must not result in the employee receiving less than the national minimum wage for hours worked during the notice period. Second, for lower-paid employees near the minimum wage, the statutory redundancy calculation (based on actual weekly pay) produces relatively small payouts, which is why enhanced redundancy schemes are particularly important for retention and goodwill in lower-paid sectors.

Severance pay in the UK must also be understood in the context of unfair dismissal risk. If an employee with at least 2 years of service is dismissed and the dismissal is found to be unfair by an employment tribunal, the employer may be ordered to pay compensation consisting of a basic award (calculated the same way as statutory redundancy pay, maximum £22,530 from April 2026) and a compensatory award (capped at the lower of 52 weeks’ gross pay or £123,543 from April 2026). Certain automatically unfair dismissals (related to pregnancy, whistleblowing, health and safety, or trade union activity) have no qualifying service requirement and the compensatory award may be uncapped.

This compensation risk is one of the primary reasons employers offer settlement agreements. A settlement payment that exceeds statutory redundancy but avoids the cost, time, and reputational risk of tribunal proceedings is often commercially rational for both parties.

Internationally

The UK’s statutory severance is relatively modest compared to most European countries, but the £30,000 tax-free threshold is more generous than many jurisdictions. The real exposure for UK employers comes not from statutory redundancy but from unfair dismissal claims and the negotiated settlements that arise to avoid them.

If you are hiring employees in the UK through an Employer of Record, the EOR is the legal employer and carries the full set of obligations around severance. The EOR is responsible for calculating statutory redundancy pay correctly using the current weekly cap and age-based formula, managing the notice period (worked or paid in lieu) and calculating PENP correctly for tax, structuring and negotiating settlement agreements with input from UK employment lawyers, applying the £30,000 tax exemption correctly and reporting payments to HMRC, handling accrued holiday pay and any contractual entitlements, and managing employment tribunal time limits (3 months minus 1 day for unfair dismissal, 6 months minus 1 day for redundancy pay claims).

Severance is where EOR quality diverges most visibly. Providers with real UK employment law expertise handle terminations as a legal process with tax, compliance, and litigation dimensions. Providers without that expertise treat them as a payroll event and create exposure.