What Is a Severance Package?
A severance package in the UK, commonly referred to as redundancy pay, is compensation offered to employees when their employment ends due to redundancy. This payment helps ease the financial impact of losing a job and may include both statutory redundancy pay (as required by law) and additional contractual benefits provided by the employer.
A typical severance package might include:
- A lump-sum redundancy payment.
- Payment in lieu of notice (PILON).
- Accrued but unused holiday pay.
- Extended benefits such as pension contributions or health insurance.
- Outplacement or retraining support.
These packages are designed to support employees through the transition period after redundancy.
Eligibility for Severance Pay in the UK
Employees qualify for statutory redundancy pay if they meet the following conditions:
- Employment Status: You must be an employee, not a contractor or freelancer.
- Length of Service: You must have completed at least two years of continuous employment with the same employer.
- Redundancy Circumstance: The role must be genuinely redundant (i.e., the job no longer exists or the business is restructuring).
Employees dismissed for misconduct or who resign voluntarily are not entitled to statutory redundancy pay. However, some employers may still offer discretionary payments or enhanced packages as goodwill.
Components of a Severance Package
A UK severance package generally includes several key elements:
- Statutory Redundancy Pay: The minimum payment required by UK employment law.
- Enhanced or Contractual Pay: Additional compensation offered by some employers beyond the statutory minimum.
- Payment in Lieu of Notice (PILON): If you are not required to work your notice period, you’ll receive equivalent pay instead.
- Holiday Pay: Compensation for any unused annual leave.
- Benefits Continuation: Some employers continue health or pension benefits temporarily after termination.
Employers may also provide outplacement support or access to counselling as part of a broader redundancy package.
How Statutory Redundancy Pay Is Calculated
Statutory redundancy pay in the UK depends on age, length of service, and weekly earnings. The calculation is as follows:
- Under 22 years: 0.5 week’s pay for each full year worked.
- Aged 22–40: 1 week’s pay for each full year worked.
- Aged 41 and over: 1.5 weeks’ pay for each full year worked.
The government currently caps weekly pay at £643 and the maximum statutory redundancy payment at £19,290 (as of 2024).
Employers are required to provide a written statement showing how redundancy pay has been calculated.
Tax Implications of Severance Packages
Severance payments in the UK can have tax-free and taxable components:
- Tax-Free Allowance: The first £30,000 of a genuine redundancy payment is tax-free.
- Taxable Amounts: Any sum above £30,000 is subject to income tax.
- PILON and Holiday Pay: These are fully taxable as normal income.
- National Insurance: Employers may need to pay NICs on payments above £30,000, but employees do not.
Employees should consider consulting a tax adviser to understand the net value of their severance package.
Negotiating a Severance Package
Negotiating an enhanced severance package is possible, particularly for senior employees or those with long service. Some strategies include:
- Request Enhanced Redundancy Pay: Ask if the company offers additional compensation beyond statutory requirements.
- Extend Benefits: Seek continued pension or healthcare coverage during the transition period.
- Ask for Outplacement Services: Career coaching or job search support can be valuable for finding new opportunities.
- Negotiate Payment Terms: Request a lump-sum payment or immediate PILON for financial flexibility.
Employers are more likely to agree to enhanced terms in exchange for signing a settlement agreement, which waives your right to bring future claims.
Statutory vs. Contractual Severance Packages
There are two main types of redundancy packages in the UK:
- Statutory Redundancy Pay:
- Defined by law.
- Based on age, service length, and weekly pay.
- Subject to government caps.
- Contractual or Enhanced Redundancy Pay:
- Set out in your employment contract or company policy.
- May exceed statutory entitlements.
- Often includes additional benefits like outplacement or extended insurance.
Always review your employment contract and staff handbook for specific entitlements before accepting an offer.
Additional Support Services
Some employers include extra support in redundancy packages, such as:
- Outplacement Services: Career transition programs, CV reviews, and interview preparation.
- Retraining or Education Grants: Funding for new qualifications or skill development.
- Employee Assistance Programmes (EAPs): Access to mental health or financial counselling.
Such benefits reflect positively on employers and can significantly assist employees during career transitions.
Common Causes of Severance Disputes
Disputes about severance packages often arise due to:
- Ambiguous Contract Terms: Unclear redundancy clauses or policies.
- Disagreement Over Eligibility: Whether the dismissal qualifies as redundancy.
- Incorrect Calculations: Underpayment or errors in statutory pay calculations.
Employees can resolve disputes informally through HR discussions or formally via an employment tribunal. Legal advice is strongly recommended before taking action.
Conclusion
Understanding your severance package rights in the UK ensures you receive fair compensation during redundancy. Knowing how to calculate statutory redundancy pay, recognise taxable elements, and negotiate additional benefits can help you make informed decisions during what can be a challenging time.
If you believe your redundancy pay has been miscalculated or unfairly withheld, seek professional legal advice promptly to protect your rights.
For fixed-fee legal help with your case,
contact Martin Taggart — your trusted UK legal partner.