Perfect Severance Pay in the UK: Answering 4 Big Questions

Severance Pay in the UK: Answering 4 Big Questions

Severance Pay in the UK: Answering 4 Big Questions

May 29, 2023

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Key Takeaways

  1. In the United Kingdom, there is no legislated severance pay for non-economic layoffs. Still, many companies choose to provide some form of payment.
  2. Statutory redundancy compensation of less than £30,000 is not taxed.
  3. Mandatory notice periods in the UK depend on the time employees have worked for their current company.
Summary

 

Severance pay in the UK is defined as a payment made to an employee by their employer when they leave their job. Known as statutory redundancy pay, it is not required in all cases of termination. This payment is intended to help the employee financially while they look for another job or take time to adjust to their new circumstances.

Severance pay in the UK may be subject to income tax and National Insurance Contributions. The rate of tax paid depends on the employee’s salary and income level.

In this article, we will define requirements around severance pay in the UK, who is eligible for it, and explain how it works. We will also review some of the laws governing employee termination in the UK.

 

Employee Termination in the UK: Laws and Policies

 

To ensure that you act ethically during the termination process, you must be sensitive to the needs of your employees. Long-term employee satisfaction needs to be assured through complete expertise with HR functions. Being familiar with local labor laws in the markets where you operate is only the first step.

The UK has strict guidelines for employer-employee relations, and in general, employees are well protected from unjust termination through the court system.

How you choose to proceed with termination should adhere to the guidelines outlined in the ACAS (Advisory, Conciliation, and Arbitration Service) code of conduct. For employers in Northern Ireland, termination should also adhere to the Northern Ireland Labour Relations Agency (LRA) code of practice.

If you violate these protocols and are taken to employment or industrial court, you are likely to be required to compensate the employee.

 

Is It Difficult to Terminate a Permanent Contract in the UK?

 

The most common form of work agreement in the United Kingdom is a permanent employment contract.

An employer may not always be required to provide notice for employees working under these agreements. This may happen when an employee is terminated for misbehavior.

If an employee is fired, the employer must always be able to state a valid reason for the termination.

If a worker is accused of purposeful misbehavior, job refusal, or contract violation, they may be fired “for cause.” Employees who are terminated “for cause” receive no additional compensation.

 

 

What are Notice Periods in the UK?

 

Employees must be given a notice period before their employment is terminated.

The following are legally mandated redundancy notice periods in the UK:

  • If a worker has been employed for one month to 2 years – at least one week’s notice is required
  • If a worker has been employed for 2 to 12 years – one week’s notice per year is required
  • If a worker has been employed for 12 years or more – 12 weeks’ notice is required

 

As a firm, you may provide more notice than the legal minimum in order to guarantee a smooth takeover of duties. 

 

What are the Requirements for Severance Pay in the UK?

 

Severance pay is a type of payment offered to employees when their contract is terminated prematurely and unwillingly. It relates to when a worker is dismissed due to circumstances beyond their control. For instance, if they were fired or the employee is redundant due to business restructuring.

Because severance pay in the UK is not a legal necessity, businesses that provide it can achieve a competitive edge in the job market. They will often attract better talent than those not offering severance packages because of the better protection given to their employees.

Severance contracts also shield you as an employer from potential lawsuits related to termination.

 

How Much is Severance Pay in the UK?

 

In the United Kingdom, there is no legislated amount of severance pay required for non-economic layoffs. The Employment Rights Act of 1996 only requires termination compensation in the event of redundancy. However, employees may choose to pursue legal action should they feel they have been terminated unfairly. In this case, termination compensation may be required.

Workers are eligible for redundancy pay in the UK if the same company has employed them for a minimum of two years. Calculating redundancy pay that workers are entitled to will be determined by the length of service (limited to 20 years) and age:

 

  • 22 and under – 0.5 week’s pay for each full year of work
  • 22 to 41 – 1 week’s pay for each full year of work
  • 41 and above – 1.5 week’s pay for each full year of work

 

However, the law has limited the maximum compensation allowed per week of “salary” to £571 since April 6, 2022.

 

 

Exceptions to These Requirements for Severance Pay in the UK

 

An employee is not qualified for severance pay in the UK if any of the following conditions are met:

 

  • The employer offers to keep the employee on in another similar role
  • The employer provides suitable alternative work to the employee
  • The employee declines alternative options without apparent reason

 

Tax and National Insurance in the UK

 

When an employee is laid off, and they are entitled to a redundancy payment, this amount could consist of the following:

 

  • Legislated redundancy compensation
  • Vacation pay
  • Remaining unpaid income
  • Benefits packages such as bonuses

 

Statutory redundancy compensation of less than £30,000 is not taxed.

severance pay in the UK

 

Partner with a Global Provider of Employment Compliance Assurance Services for Perfect Severance Pay in the UK

 

Should you need to dismiss employees in the UK, it can help to have an expert in labor law and best practices on your side. The long-term security of your company and your employees depends on familiarity with labor law requirements. This means knowing how to to take care of your permanent employees as well as those on fixed-term contracts.

By partnering with a global HR and payroll outsourcing services provider, you gain access to the insightful expertise of local HR professionals worldwide.

INS Global helps you to ensure that all your HR guidelines meet the requirements of all local regulations around termination, notice periods and severance pay in the UK. Outsourcing your payroll may be the best way to remain aware of constantly changing rules.

If you need assistance discussing your employee cases, you can arrange a meeting with one of our international payroll industry experts today to learn more.

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