In December 2024 alone, a quarter of UK workplaces reported that they cut jobs. The imminent increase in employer national insurance contributions and national minimum wage, which take effect in April 2025, is likely to see more employers consider this course of action.
Here, our Payroll team guides you through potential termination payments and other costs associated with ending an employee’s contract.
Notice pay
Employees are entitled to a certain period of notice to end employment unless they are being dismissed for gross misconduct.
Employers can have the employee work through their notice period or put them on gardening leave. Gardening leave is when an employee doesn’t come into work during their notice period.
You can pay an employee Pay in Lieu of Notice (PILON) if it is included in their contract.
Notice pay is pensionable because an employee should continue to receive their contractual benefits. However, PILON may not be pensionable as it depends on what is included in the employee’s contract.
Statutory notice periods are based on the employee’s length of service.
| Length of service | Statutory notice period |
| 1 month – 2 years | 1 week |
| 2 – 12 years | 1 week for every year worked |
| Over 12 years | 12 weeks capped |
You can pay an employee more than the statutory notice, but not less.
Holiday pay
Within their final pay, employees are also entitled to any accrued holiday that they haven’t taken but are entitled to. This is calculated on a pro-rata basis – i.e., if redundancy occurs ¾ of the way through the holiday year, then the entitlement is ¾ of the holiday allowances minus any days already taken.
Where an employee has taken more than their accrued holiday entitlement, the employer can deduct this from their final pay if it is within their contract or they have agreed in writing beforehand.
Statutory redundancy pay
Statutory redundancy pay is a compensation payment employers need to pay an employee being made redundant. However, not all employees are entitled to this payment. Employees should be selected for redundancy in a fair manner, or could take the matter to an employment tribunal.
An employee is not entitled to redundancy if you offer to let them keep their job or they refuse a suitable alternative without a good reason.
Employees must have been employed for at least two years to be eligible for statutory redundancy pay.
Employees will not qualify for statutory redundancy pay if they work in the Armed Forces or police force, or are crown servants or domestic service (where the employer is the employee’s immediate family).
An employee’s entitlement is determined by their age.
| Employee age | Statutory redundancy pay |
| < 22 | 0.5 weeks for every year worked |
| 22-40 | 1 week for every year worked |
| >41 | 1.5 weeks for every year worked |
A week’s pay is the employee’s average pay over the 12 weeks before receiving the redundancy notice. It is capped at £700 per week, and the years worked are capped at 20. Therefore, the maximum amount of statutory redundancy pay is £21,000 (£700 x 20 years x 1.5 weeks).
Ex-gratia payments
An ex-gratia payment is a payment that goes above and beyond what is due to the employee for their termination. If an employer enhances an employee’s redundancy pay, the enhancement would be an ex-gratia payment. Employers are not legally required to make ex-gratia payments, but they are common in redundancy situations.
An employee’s notice pay, holiday pay or final salary can’t be paid as part of an ex-gratia payment. These amounts will always be subject to tax and national insurance.
Ex-gratia payments under £30,000 are not subject to tax or national insurance. Any statutory redundancy payments made are included within this £30,000. Amounts over the £30,000 are subject to tax, and class 1A national insurance for the employer.
Both statutory redundancy and ex-gratia payments do not count as pensionable earnings and therefore no pension contributions should be made on them.
Should you need any help navigating termination payments, please contact our payroll team on payroll@ct.me.
