"Severance pay" usually refers to the money an employee receives when their employment ends, most commonly statutory redundancy pay, sometimes topped up by an enhanced or negotiated package. Here is a plain-English guide to who gets it and how it is worked out in England and Wales.
What "severance pay" means
There is no single legal payment called "severance pay". In practice it covers:
- statutory redundancy pay (a legal entitlement on redundancy);
- enhanced (contractual) redundancy pay (if the employer offers more);
- a negotiated settlement payment (often via a settlement agreement); and
- other sums owed on termination (notice/PILON, accrued holiday).
The core legal entitlement is statutory redundancy pay.
Who is eligible for statutory redundancy pay?
To qualify for statutory redundancy pay, an employee must:
- be an employee (not a self-employed contractor);
- have at least two years' continuous service; and
- be dismissed by reason of redundancy (the job/workplace has gone or the need for that work has reduced).
An employee who unreasonably refuses a suitable alternative job may lose the entitlement.
How statutory redundancy pay is calculated
It uses an age-banded formula based on complete years of service (capped at 20 years):
- 0.5 week's pay for each full year worked when under 22;
- 1 week's pay for each full year worked when 22–40; and
- 1.5 weeks' pay for each full year worked when 41 or over.
A statutory weekly pay cap applies, and it is reviewed every April. (For example, the cap was £700 per week from April 2024, giving a maximum statutory payment of £21,000 (20 years × 1.5 × £700); later years' figures are higher, check the cap current at the date of redundancy.) Statutory redundancy pay is generally tax-free.
Collective redundancies: extra obligations
Where an employer proposes 20 or more redundancies at one establishment within 90 days, collective consultation duties apply (Trade Union and Labour Relations (Consolidation) Act 1992, s 188), including consulting employee representatives and notifying the government, with minimum consultation periods. Failure can lead to a protective award (extra compensation).
Tax on severance payments
- Statutory redundancy pay is tax-free.
- Genuine ex-gratia/compensation termination payments can be paid tax-free up to £30,000; the excess is taxable.
- Earnings (notice pay/PILON (via PENP), accrued holiday, bonuses) are always taxable and do not benefit from the £30,000 exemption.
Practical points
- Employers: identify a genuine redundancy, use fair selection and consultation, calculate statutory pay correctly, and apply the right tax treatment.
- Employees: check your statutory entitlement, any enhanced scheme, and the tax split; take advice on any settlement agreement (which requires independent legal advice to waive claims).
Key takeaways
- "Severance pay" usually means statutory redundancy pay, possibly enhanced or settled by agreement.
- Eligibility for statutory redundancy pay: an employee with 2+ years' service dismissed for redundancy.
- It is calculated on an age-banded formula (max 20 years) with a weekly cap reviewed each April (e.g. £700/£21,000 from April 2024, check current figures); statutory redundancy pay is tax-free.
- Collective consultation (s 188) applies for 20+ redundancies; only genuine compensation gets the £30,000 tax-free threshold (earnings/PILON are always taxable).
Sources
- Employment Rights Act 1996 (statutory redundancy pay, eligibility and age-banded formula; weekly cap reviewed each April)
- Trade Union and Labour Relations (Consolidation) Act 1992, s 188 (collective consultation; protective award)
- Income Tax (Earnings and Pensions) Act 2003 (taxation of termination payments; PENP; £30,000 exemption)
--- This article is general information about the law of England & Wales as at 2026, not legal or tax advice. For advice on your circumstances, consult a qualified solicitor or tax adviser.