What is redundancy?

Redundancy is defined as an employer terminating a job role. This is usually done either because the job is no longer needed, or the employer needs to trim down the workforce. Being made redundant is often overwhelming. That’s why we’re here to try and make the process easier, by outlining what pay you’re entitled to, and how you can claim it.

What is redundancy pay?

If you are made redundant, you may be entitled to compensation. This compensation is known redundancy pay (also severance pay).

Am I eligible for redundancy pay?

You’re lawfully entitled to receive statutory redundancy pay if you’ve been with your current employer for 2 years or more.

The amount you get depends on your earnings before tax (gross pay). Citizen’s Advice calculates redundancy pay as follows: “for each full year you’ve worked for your employer, you get: age 18 to 22 – half a week’s pay. Age 22 to 40 – 1 week’s pay.”

Voluntary redundancy

Voluntary redundancy is when a member of staffed is asked – by their employer – to terminate their own contract. This is usually offered by an employer in exchange for a financial incentive. Voluntary redundancy is common in a workforce that needs restructuring or slimming down.

Losing your job may seem a scary thought at first, but voluntary redundancy could be a blessing in disguise. The lump sum received could be used to pay off any potential outstanding debts. It also gives you the chance to change your career.

Of course, we don’t recommend making such a decision hastily. When faced with voluntary redundancy, make sure you consider all the factors.

Compulsory redundancy

This is similar to voluntary redundancy in many ways, however in this case the employee can’t refuse. Compulsory redundancy is equally common in the slimming down of a work force, although it can be distressing for those who don’t want to leave.

Visit our main redundancy page for more information on coping with sudden, unforeseen redundancies.


Is redundancy pay tax-free?

Redundancy pay qualifies for special tax treatment; up to £30,000 is tax free. Any non-cash benefits included in your redundancy package – your company car for example – will be worked out as a cash value then added to your pay. This may then take your redundancy pay over the £30,000 limit, meaning you’ll be taxed on the rest.

Top tip – before you receive your redundancy package, work out the tax in advance. You’ll avoid any unwelcome surprises should you miscalculate it. Equally, you’ll know you’ve been compensated entirely what you’re owed.

After redundancy

To help support yourself post-redundancy, you may be eligible for certain state benefits i.e. Universal Credit or Jobseeker’s Allowance. Your eligibility depends on a number of factors such as your savings, family situation and health. To find out what benefits you could get and how to claim them, see GOV.UK’s benefits calculator.

Redundancy and debt

If you’ve recently been a victim of redundancy and have lost your income as a result, don’t worry. There are still steps you can take (such as budgeting) to maximise what funds you have. Have a read over our money saving tips on budgeting and more.

Any drastic change of income is hard to cope with. If you find debts are mounting up as a result, contact PayPlan today. Give us a call on 0800 316 1833 . Alternatively, visit us online and fill in our free debt help form.