Calculate Severance Pay: A Complete UK Guide

Calculating severance pay in the UK can feel like decoding a recipe written in another language. There are age brackets, service years, weekly pay caps, and tax thresholds to juggle, and one miscalculation could mean an awkward conversation with HMRC or, worse, an employment tribunal. Whether you’re a seasoned hospitality owner who’s weathered multiple storms or you’re navigating your first redundancy situation, understanding how to calculate statutory redundancy pay (and when to go beyond it) is crucial.

In this guide, we’re breaking down everything you need to know: who qualifies, how to crunch the numbers step-by-step, what counts as a week’s pay, the difference between statutory and enhanced packages, tax implications, and the common pitfalls that trip up even experienced employers. Let’s get you confident and compliant.

What is statutory redundancy pay and who qualifies for it?

Statutory redundancy pay is the minimum amount you’re legally required to pay an employee when their job is made redundant. Employees qualify if they’ve worked for you continuously for at least two years and are being dismissed due to genuine redundancy—meaning their role is no longer needed, not due to performance or misconduct. For hospitality businesses, this might include closing a location, reducing staff after a menu change, or merging roles following reduced footfall.

Not everyone qualifies. Contractors, casual workers without continuous employment, and those with less than two years’ service aren’t eligible. Audit your team’s employment status and start dates before beginning any redundancy process to avoid miscategorizing employees and potential legal issues.

Eligibility requirements

To qualify for statutory redundancy pay, your employee must meet these criteria:

• At least two years of continuous service: Continuous service means uninterrupted employment, though certain breaks like maternity leave or furlough don’t break continuity.
• Employee status: Only employees qualify—not independent contractors or zero-hours workers without guaranteed work. This is worth reviewing, especially in hospitality where flexible contracts are common.
• Genuine redundancy: The dismissal must be due to redundancy, not disciplinary reasons, poor performance, or resignation. Closing your bar due to rent increases is redundancy. Dismissing someone for poor conduct isn’t.
• Below State Pension age or not retired: Employees at State Pension age may still qualify, but the rules can be complex. Seek advice for long-serving older employees.

Note: Employees on fixed-term contracts can also qualify if their contract isn’t renewed and they’ve completed two years of service across multiple contracts.

How to calculate severance pay UK: step-by-step formula

Let’s get into the actual math. Calculating statutory redundancy pay requires attention to detail—one wrong digit and you could be overpaying (or worse, underpaying). The formula hinges on three key factors: length of service, age, and weekly pay.

Years of service

First, figure out exactly how long your employee has been with you using their official start date and employment end date. This calculation is based on complete years of service, and here’s the kicker: you only count up to 20 years maximum, even if someone’s been with you since the ’90s.

Remember that continuous service includes maternity leave, paternity leave, sick leave, and furlough. Career breaks may interrupt continuity, so double-check the timeline.

Age-based multiplier

Once you’ve nailed down the years of service, the next step is applying the age-based multiplier. Statutory redundancy pay uses a tiered system that rewards older employees more generously (presumably because they have a tougher time finding new work). Here’s how it breaks down:

• For each full year of service under age 22: 0.5 weeks’ pay
• For each full year of service between ages 22 and 40: 1 week’s pay
• For each full year of service at age 41 or older: 1.5 weeks’ pay

Let’s say you’re calculating redundancy for a sous chef who’s 38 years old and has worked for you for 10 years. You’d apply the formula like this:

• Years worked while aged 22–40: 10 years × 1 week’s pay = 10 weeks’ pay

But if that same chef had started at age 18 and worked for 10 years (so they’re now 28), the calculation would look like:

• Years worked while under 22: 4 years × 0.5 weeks’ pay = 2 weeks’ pay
• Years worked while aged 22–28: 6 years × 1 week’s pay = 6 weeks’ pay
• Total: 8 weeks’ pay

See how age brackets shift the outcome? It’s a sliding scale designed to protect older workers, but it also means you need to track birthdates and employment start dates accurately.

Weekly pay cap

Here comes the part that might sting a little (or offer relief, depending on your payroll): there’s a legal cap on what counts as a “week’s pay” for statutory redundancy purposes. As of April 2025, that cap is £700 per week. Even if your head bartender earns £1,000 per week, you only calculate their redundancy pay based on £700.

This cap is updated annually (usually in April), so always check the current figure on the UK government’s website. Using an outdated cap could mean you’re underpaying, and that’s a compliance risk you don’t need.

Let’s bring it all together with an example:

Example: Your restaurant manager is 45 years old, has worked for you for 12 years, and earns £850 per week (but the cap is £700).

• Years worked while aged 41 or older: 12 years × 1.5 weeks’ pay = 18 weeks’ pay
• Weekly pay (capped): £700
• Total statutory redundancy pay: 18 × £700 = £12,600

Not too shabby, right? But remember, this is the statutory minimum. You can (and often should) offer more, especially if you want to part on good terms and maintain your reputation as a fair employer.

What counts as a week’s pay for redundancy calculations?

Figuring out what counts as a “week’s pay” is the foundation of your entire redundancy calculation, and it can be tricky in hospitality where shifts vary, tips fluctuate, and bonuses add complexity. Getting this right is critical.

For employees with fixed working hours and a regular salary, it’s straightforward: use their gross weekly pay (before tax and National Insurance). If they’re paid monthly, divide their monthly salary by 4.33 to get the weekly figure.

For staff on variable hours or zero-hours contracts, calculate their average weekly pay over the 12 weeks immediately before they received redundancy notice. Exclude any weeks where they didn’t earn anything, using the nearest weeks that do count. This average should include base pay plus any regular bonuses, commission, or guaranteed overtime.

Here’s what doesn’t count:

• Tips and service charges: Unless they’re paid directly through payroll as part of the tronc system and treated as wages, tips don’t count toward a week’s pay.
• Discretionary bonuses: Occasional, non-contractual bonuses aren’t included.
• Expenses and benefits in kind: Meals, accommodation, or travel allowances don’t count.

If your employee’s pay varies significantly week to week, the 12-week average smooths out peaks and troughs, giving you a fair representation of typical earnings. Make sure you’re pulling accurate payroll records—if this ends up in a dispute, you’ll need to back up your numbers.

Should you offer enhanced redundancy packages beyond the minimum?

So you’ve calculated the statutory minimum. But should you stop there, or sweeten the pot?

Enhanced redundancy packages are anything you pay above the statutory requirement. Why offer more than legally required?

• Reputation matters: Hospitality is a small world. Treating departing staff generously boosts your employer brand and makes future recruitment easier.
• Negotiation leverage: Enhanced redundancy smooths the process, reduces tribunal risks, and encourages employees to sign settlement agreements.
• Moral obligation: If someone’s been loyal for years and you’re closing through no fault of theirs, going the extra mile feels right.

Enhanced packages typically include:

• Multiplying the statutory formula (e.g., 2× or 3× the statutory amount)
• Removing or raising the weekly pay cap
• Adding notice pay, unused holiday payments, or outplacement services

Remember: enhanced payments over £30,000 are subject to tax and National Insurance. Factor in the tax hit and consult your accountant before committing.

Get severance calculations right the first time

Calculating severance pay in the UK is straightforward once you understand the formula, age brackets, and weekly pay cap. For bar and restaurant owners, getting this right ensures legal compliance while maintaining trust and protecting your reputation during difficult transitions.

Remember: statutory redundancy pay is the baseline, but you can offer enhanced packages if appropriate. Factor in tax implications, avoid common calculation mistakes, and maintain accurate records. When in doubt about continuity of service, variable pay, or tax treatment, consult an expert—professional advice now prevents costly problems later.

Redundancy is never easy, but handling it with clarity and fairness helps you navigate it confidently. Your team and the wider hospitality community will remember how you managed the tough times.