Enhanced redundancy packages explained

It is difficult for employees and employers alike when the time comes to make redundancies across a business. For those impacted, it can be particularly difficult to understand the terms used, and what your entitlements are as an employee. While statutory redundancy pay is a legal minimum entitlement for qualifying employees, many employers also offer enhanced redundancy packages as a gesture to ease transitions and reduce the risk of legal disputes.

To help employers and employees understand their rights, we have prepared a quick easy guide to redundancy pay, separating out what an employer must pay, and what they can pay.

Statutory Redundancy Pay

Employees are entitled to statutory redundancy pay if they:

• Are legally classed as employees (not workers or self-employed);
• Have been selected for redundancy; and
• Have at least two years of continuous service with their employer.

The statutory calculation is based on:

• Age,
• Length of service (capped at 20 years)
• Weekly gross pay (capped at £719 as of April 2025)

The formula for calculating this is :

• 0.5 week’s pay for each full year under age 22,
• 1 week’s pay for each full year aged 22–40,
• 1.5 weeks’ pay for each full year aged 41 and over.

Other mandatory payments on termination would also include accrued but untaken annual leave and unpaid wages. Some employers, where the contract allows, may make a payment in lieu of notice.

For a quick calculation of your statutory entitlement, please check out our redundancy calculator. 

What Is Enhanced Redundancy Pay?

Enhanced redundancy pay is an amount offered by the employer in addition to the statutory minimum above. Employers may offer this:

• As part of a contractual entitlement,
• Through a collective agreement with a union,
• Or on a discretionary basis

There is no legal obligation to offer enhanced redundancy pay unless it is contractually agreed.

An enhanced redundancy payment (also called an ex-gratia payment, or termination payment) is often based on an increase to the statutory minimum. For example, an employer may opt to pay 1 week additionally, for each complete years’ service, although such an approach can come with risks of age discrimination claims. Some employers instead take a more blanket approach, offering for example, 1 month pay to all employees impacted.

Enhanced redundancy packages may also include elements other than just a financial payment, for example: an agreed reference (beyond the standard factual); allowing employees to continue to use their company benefits after termination; payment for a discretionary bonus and/or under a company share plan.

Tax Implications

The first £30,000 of redundancy pay (including both statutory and enhanced elements) is generally considered tax-free. Any amount above this threshold would be subject to tax at the employees usual rate.

This £30,000 does not apply to any salary payments, including holiday, notice and unpaid wages.

The fact that such a payment is tax-free is often a key factor for employees, as an employee facing redundancy will often be considering how much they will actually end up with in their pocket.

Settlement Agreements

It is common practice for employers offering enhanced redundancy on a discretionary basis (i.e. non-contractual) to require the signing of a settlement agreement in return for the discretionary increase.

The benefit of this for the employee is that they get an enhanced sum, and can agree terms such as payment of bonus, wording of references and announcements, waiver of non-competes, and any other terms that are important to them.

The benefit for the employer, is that in return for the discretionary payment, the employee confirms that it will not pursue a claim against the employer.

If an employer is offering a discretionary redundancy payment, we strongly recommend that employers look at their template settlement agreements, to ensure that they are not overly burdensome, and sufficient for the purpose. Employers are far more likely to end up in disputes if they ask an employee to sign excessive terms, which are entirely unnecessary in that redundancy situation.

Tips for Employers

There are a few potential pitfalls that employers should be wary of when offering enhanced redundancy.

If an employer usually offers a discretionary enhanced payment, this may result in a custom and practice argument where an employee can say that the employer usually does, so should offer it for them. Employees may feel aggrieved and challenge the decision if they are not offered enhanced terms that they have seen their ex-colleagues received time and again. We recommend employers consider their messaging around such changes if they are amending the usual offering.

Employers should also consider the risks of age discrimination when setting the criteria for enhanced redundancy calculations, and our employment team is on hand to provide tailored advice on this.

Employment Rights Bill

The Employment Rights Bill is currently making its way through Parliament, and at the time of writing we are expecting this to become law in Autumn 2025. The Bill contains significant changes to employment rights across a broad spectrum, including changes to the thresholds for collective consultation in a redundancy. These changes will impact every employer, and we strongly recommend that employers start taking action now to prepare for these changes.

To get to grips with what the bill means for your organisation, and what changes you specifically need to prepare for, we are offering a bespoke review for businesses of their risk areas and an accompanying action plan for preparing for the changes. Please reach out to our employment team for more information about this service.

Further information

Redundancy and reorganisation situations can be difficult for all those involved. Our employment lawyers offer clear and timely tailor-made advice to guide you through the process. Find out more about our redundancies and settlement agreements services.