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 comparing severance pay and redundancy pay in England and Wales, explaining statutory redundancy entitlements, how severance packages differ, eligibility, calculation methods, legal rights, and practical steps for employees and employers.
Understanding the difference between severance pay and redundancy pay is important for employees and employers in England and Wales. These terms are often used interchangeably, but they refer to different types of payments with distinct legal foundations, eligibility criteria and practical implications. This article explains what each payment means, how they are calculated, when they arise, key rights and processes, potential risks and frequently asked questions. It is intended for solicitors, employers, students and members of the public seeking a clear, accurate and comprehensive overview.
Why the Distinction Matters
Both severance and redundancy payments are associated with the end of employment, but they arise in different contexts and under different rules. Redundancy pay is a statutory entitlement in certain circumstances, enforced by legislation and backed by specific legal protections. Severance pay is a broader concept that may include redundancy pay but also encompasses additional, often negotiated or discretionary payments not specifically required by law. Clarifying the distinction helps employees understand their legal rights and employers fulfil their legal and contractual obligations.
What Is Redundancy Pay?
Redundancy pay arises when an employee's job is no longer needed because of business changes such as closure, restructuring, or reduced need for employees. It is a legal right under the Employment Rights Act 1996 for employees with at least two years' continuous service.
Eligibility
To qualify for statutory redundancy pay, an individual must:
- Be classed as an employee (not a self‑employed contractor).
- Have two years or more continuous service at the date of dismissal.
- Be dismissed for redundancy reasons (genuine business requirement to reduce staff).
Calculation
Redundancy pay is calculated using a statutory formula based on:
- Age at the time of redundancy, with varying week multipliers for different age bands.
- Length of continuous service, capped at 20 years.
- Weekly pay, using an average and subject to a statutory cap (currently £719 per week from April 2025).
This yields a statutory minimum payment. Employers may offer contractual or enhanced redundancy pay above this minimum, but they cannot offer less.
Legal Protections
Redundancy pay is a statutory entitlement. Failure to pay can lead to claims in the employment tribunal, typically within six months minus one day of dismissal.
What Is Severance Pay?
Severance pay is a broader and non‑statutory concept that refers to financial compensation and benefits offered to an employee when their employment ends. It may include redundancy pay as one component, but it also covers other elements that are discretionary, contractual or negotiated.
Nature and Purpose
Severance pay can be offered in many situations, including:
- Redundancy.
- Mutual termination by agreement.
- Settlement of potential claims.
- Termination for business or performance reasons not constituting redundancy.
Unlike statutory redundancy pay, severance pay is not mandated by law unless expressly provided in an employee's contract or under a policy. Employers often use severance packages to provide a financial cushion, resolve disputes and encourage a smooth exit.
Components of a Severance Package
Severance can include:
- A lump sum payment beyond statutory redundancy.
- Notice pay or payment in lieu of notice (PILON).
- Accrued holiday pay and other owed pay.
- Discretionary ex gratia payments or enhanced sums as part of a negotiated exit.
- Non‑monetary benefits such as outplacement support or career transition services.
The exact content depends on contract terms, employer policy or agreement between the employee and employer.
Key Differences Between Severance and Redundancy Pay
| Feature | Redundancy Pay | Severance Pay |
|---|---|---|
| Legal requirement | Mandatory (if criteria met) | Not mandatory unless contractual |
| Statutory basis | Yes (Employment Rights Act 1996) | No statutory definition |
| Context | Only when a role is genuinely redundant | Any termination reason or negotiated exit |
| Calculation | Fixed formula (age, service, pay) | Variable, negotiated or employer policy |
| Tax treatment | Tax‑free up to £30,000 for statutory redundancy | May be taxable depending on components |
| Tribunal claims | Enforceable as a statutory right | Contractual or claims only if agreed terms breached |
| Compiled from UK government and legal guidance. |
How Severance May Interact With Redundancy
In many redundancy situations, a severance package may include redundancy pay as a baseline and add further payments to provide enhanced compensation or to settle potential legal claims (for example, claims for unfair dismissal). Employers may offer this as part of a settlement agreement, where the employee agrees not to pursue certain claims in exchange for additional severance.
It is important that employers do not use severance to avoid statutory redundancy obligations by mislabelling payments; statutory minimums must always be honoured where redundancy criteria are met.
Tax and National Insurance Considerations
Statutory redundancy pay is generally tax‑free up to £30,000 when it meets legal criteria. However, other elements commonly included in severance packages - such as PILON, notice pay and discretionary lump sums - may be taxable and subject to National Insurance unless specific tax rules apply. Understanding the tax treatment of different components is important for employees and employers alike.
Practical Process: Employee and Employer Perspectives
For Employees
- Check eligibility for statutory redundancy pay (service, role redundancy).
- Review your contract and any staff policies for enhanced or contractual severance terms.
- Request written details of redundancy and severance calculations.
- If offered a settlement agreement, consider independent legal advice before signing.
- If statutory rights are not met, you may be able to pursue a tribunal claim within strict time limits.
For Employers
- Apply statutory redundancy rules fairly, including consultation and selection processes.
- Distinguish clearly between statutory redundancy pay and any severance package elements.
- Document severance terms clearly in letters or settlement agreements.
- Be aware of tax implications for different components and ensure correct payroll treatment.
Common Questions
Can severance pay replace redundancy pay?
No. If a role is genuinely redundant and the employee qualifies, the statutory redundancy entitlement must be paid. Severance can add to this amount, but cannot reduce or replace it.
Is severance pay always offered?
No. Severance is not mandatory unless written into contract or agreed upon. Employers may choose to offer it as part of a negotiated exit.
Is redundancy pay taxable?
Statutory redundancy pay is usually tax‑free up to £30,000. Other severance elements may be taxable depending on their nature.
Do I still get redundancy pay if I have less than two years' service?
No. Statutory redundancy requires at least two years' continuous service; however, employers may choose to offer enhanced severance to shorter‑serving employees as part of a negotiated package.
Key Takeaways
Redundancy pay is a specific statutory entitlement for employees dismissed because their role is no longer required, calculated by law based on age, service and pay. Severance pay is a broader, often negotiated or discretionary concept that may include redundancy pay but also encompasses additional benefits and payments when employment ends. Redundancy pay must be honoured where the law requires it, while severance pay depends on employment contracts, policies or settlement agreements. Understanding these distinctions, including tax implications and eligibility criteria, helps employees secure the payments they are owed and enables employers to meet their legal and contractual obligations with clarity and confidence.
