🇬🇧 UK · Employment Law · Updated 2026-06-27
Severance pay vs redundancy pay: are they the same thing?
In UK employment law, 'redundancy pay' has a specific statutory meaning — it is the payment owed under the Employment Rights Act 1996 when you are made redundant after 2 years' service. 'Severance pay' is a broader, informal term that can refer to the total exit package including notice pay, redundancy pay, accrued holiday, and any ex gratia payment. Knowing what each element is and how it is taxed is essential before signing any settlement.
Key differences at a glance
| Aspect | Statutory redundancy pay | Severance pay |
|---|---|---|
| Definition | A statutory payment owed under ERA 1996 when employment ends by reason of redundancy | An umbrella term for any payment made on termination — may include notice pay, redundancy pay, holiday pay, and ex gratia payments |
| Legal basis | Mandatory under ERA 1996 s.135 — employer has no discretion to refuse if conditions are met | Contractual or negotiated — depends on what the employer agrees to pay (or the contract requires) |
| Qualifying condition | 2 years' continuous employment; genuine redundancy | As agreed — may be available from day one if the contract provides it |
| Calculation | Statutory formula: age × years × weekly pay (capped at £751); maximum £22,530 | Depends on the exit agreement — may be a multiple of salary, a fixed sum, or a formula |
| Tax treatment | Tax-free up to £30,000 (combined with other qualifying termination payments) | Notice pay is fully taxable. Redundancy and ex gratia elements are tax-free up to £30,000 combined. Amounts above £30,000 are taxed. |
| Can employer refuse? | No — withholding statutory redundancy pay is unlawful; can claim at tribunal within 6 months | If contractual: no — breach of contract claim available. If discretionary: employer has more latitude, but consistent past practice creates expectations. |
| Typical components | Statutory formula payment only | Notice pay (PILON) + statutory redundancy pay + enhanced redundancy + ex gratia + accrued holiday + benefits buyout |
The bottom line
When your employer offers you a 'severance package', check each component separately. Statutory redundancy pay is a legal floor — it can be enhanced but not reduced. Notice pay (or PILON) is a separate entitlement. Any amount described as 'ex gratia' or 'compensation' is negotiable and may benefit from the £30,000 tax-free threshold. Always get the breakdown of each element in writing before signing a settlement agreement.
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Calculate →Frequently asked questions
Is redundancy pay the same as a settlement agreement payment?
No. Redundancy pay is a specific statutory entitlement under ERA 1996. A settlement agreement is a legally binding contract under which you waive your right to bring tribunal claims in exchange for an agreed payment. The settlement payment may include statutory redundancy pay, enhanced redundancy pay, PILON, and an ex gratia payment — but the settlement agreement itself is a broader document that ends the employment relationship and settles all claims.
Can I negotiate my severance package?
Yes — within limits. You cannot negotiate below the statutory minimums (statutory redundancy pay, statutory notice). But the ex gratia component, any enhanced redundancy, and the notice payment structure are all negotiable. Your strongest negotiating lever is any potential tribunal claim — unfair dismissal, discrimination, or breach of contract claims give you leverage to negotiate a higher exit package.
What is an ex gratia payment?
Ex gratia means 'as a favour' — a payment not required by contract or statute but paid by the employer as a goodwill gesture (often to settle potential claims or incentivise a clean exit). Ex gratia payments qualify for the £30,000 tax-free threshold when combined with statutory redundancy pay. They are often the negotiable element of an exit package and should be maximised in settlement negotiations.
Is statutory redundancy pay always tax-free?
Statutory redundancy pay is part of the £30,000 tax-free threshold on termination payments. Provided your total qualifying termination payments (statutory redundancy pay + any enhanced redundancy + ex gratia) do not exceed £30,000, you pay no tax or National Insurance on them. If the total exceeds £30,000, only the excess is taxable. Note that notice pay (PILON) is always fully taxable and does not count towards the £30,000.
My employer is calling my exit a 'mutual agreement' — do I still get redundancy pay?
Possibly not automatically. Statutory redundancy pay requires a dismissal by reason of redundancy — if you agree to leave voluntarily (even in a redundancy situation), this may be treated as a consensual termination that does not trigger the statutory entitlement. However, if the underlying reason is genuinely that your role is redundant, many employers still pay statutory redundancy pay as part of the package. If they do not, and the redundancy situation is genuine, you may be able to challenge the characterisation at tribunal.