This guide is maintained as a current resource for July 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Comprehensive guide on whether employers are required to offer severance pay in England and Wales, explaining statutory redundancy, contractual obligations, company policies, settlement agreements, legal processes and rights for employees and employers.
When an employment relationship ends in England and Wales, employees and employers often discuss severance pay as part of the exit process. However, it is important to be clear about what UK employment law actually requires employers to provide and when payments like severance, redundancy pay, notice pay or others arise. This article explains the statutory position, contractual obligations, common practices, legal processes, time limits, potential risks and frequently asked questions - all in clear terms with reference to authoritative UK sources and legal frameworks.
Severance Pay in Context
“Severance pay” is a broad commercial term for compensation that an employee might receive when their employment ends. In the UK, there is no universal statutory requirement for employers to offer severance pay simply because someone's employment ends. Instead, the law sets out specific statutory entitlements, such as statutory redundancy pay if certain conditions are met, along with requirements around notice and payment of accrued entitlements. Anything beyond those statutory entitlements - often referred to as severance pay or enhanced exit payments - usually arises from contractual terms, company policies, or negotiated settlement agreements rather than mandated legal rights.
What the Law Requires Employers to Pay
1. Statutory Redundancy Pay
When a role is genuinely made redundant and an employee has at least two years' continuous service, the employer is required by statute to pay statutory redundancy pay. This entitlement arises under the Employment Rights Act 1996 and is calculated using age, length of service and capped weekly pay. Employers must pay this where the statutory criteria are met.
2. Notice Pay
Employers are required to provide either the statutory notice period (or a longer contractual notice period if specified) or to pay in lieu of notice (PILON). Statutory notice depends on length of service and ranges from one week to 12 weeks. This is independent of severance pay and applies to most terminations unless the employee is dismissed for gross misconduct.
3. Holiday and Outstanding Pay
On termination, employees are also entitled to payment for accrued but untaken statutory holiday and any other pay owed such as wages up to the termination date. Again, these are statutory or contractual entitlements, not discretionary severance.
When Severance Pay Is Not Legally Required
Severance pay - meaning a payment beyond statutory redundancy, notice and other owed pay - is generally not required by UK law when employment ends unless one of the following applies:
- It is provided for in the employee's contract of employment or workplace policy.
- It is agreed as part of a settlement agreement (also known as a compromise agreement), for example in exchange for a waiver of claims such as unfair dismissal or discrimination.
- It is part of a company's voluntary severance or enhanced redundancy scheme set out in policy or negotiated with employees.
In the absence of contractual or agreed terms, employers may choose to offer severance pay, but there is no statutory duty to do so.
Contracts, Policies and Customary Practice
Contractual Obligations
An employer may be required to pay severance if the employment contract or staff handbook explicitly provides for such payments upon termination. These terms are legally enforceable as contractual rights. In such cases, an employee can pursue a claim for breach of contract if the severance payment is not honoured.
Company Policy and Custom
Some organisations adopt severance policies that offer enhanced payments in certain situations (for example, voluntary redundancy schemes or long service awards). While these are not statutory, once published and relied on, they can form part of the terms of employment.
Settlement Agreements
Employers may use a settlement agreement to formalise severance terms. This written, legally binding agreement often involves the employee receiving a severance payment (sometimes more than the statutory minimum) in return for waiving the right to bring employment tribunal claims. Independent legal advice for the employee is a requirement for a settlement agreement to be valid.
Practical Implications and Legal Risks
Mislabelled Payments
Employers cannot avoid statutory redundancy obligations simply by labelling a payment “severance” if, in reality, the payment is a statutory entitlement. Redundancy pay must be paid where due, regardless of what it is called in documentation.
Tribunal Claims
If an employer fails to provide statutory redundancy pay, notice pay or other statutory termination entitlements, employees can bring claims to an employment tribunal. Typical claims include:
- Statutory redundancy pay claims (within six months of termination).
- Notice pay or contractual pay claims (generally within three months minus one day).
- Unfair dismissal claims where the redundancy process was procedurally or substantively flawed.
Settlement agreements covering enhanced severance should be properly executed; otherwise, an employee may still pursue claims despite having signed an agreement if that agreement is invalid.
Common Questions
Is severance the same as statutory redundancy pay?
No. Statutory redundancy pay is legally required when criteria are met; severance pay is generally discretionary unless contractually or contractually/settlement‑agreed.
Do I have to provide severance to all employees?
No. An employer is not legally obliged to provide severance pay in every exit. Requirements depend on the reason for termination and what is set out in contract, policy or agreement.
Can severance be negotiated?
Yes. Severance payments - especially those above statutory minimums - are often negotiated and formalised in a settlement agreement that specifies the payments and any claims waived.
Is severance pay taxable?
Tax treatment varies by component. Statutory redundancy pay is generally tax‑free up to £30,000, but other payments such as PILON or contractual payments may be taxable. (Separate HMRC guidance covers tax treatment; see government sources for details.)
Key Takeaways
In England and Wales, employers are not universally required to offer severance pay simply because an employee's contract ends. The law mandates statutory redundancy pay, notice pay and settlement of accrued entitlements only where specific criteria are met. Severance pay beyond these statutory obligations arises from contractual terms, company policies or negotiated settlement agreements. Employers should ensure that they comply with statutory requirements and clearly document any additional severance arrangements to avoid disputes. Employees should review their contracts and seek clarification on entitlements, and consider legal advice where severance or redundancy rights are unclear or disputed.
