(Or: “It’s Emotional Enough Without Payroll Getting It Wrong”)
Redundancy is never easy.
For employers, it’s one of the hardest decisions you’ll make.
For employees, it’s unsettling, emotional, and often overwhelming.
And for payroll? It’s the moment when every calculation suddenly matters a lot more.
Because when redundancy is involved, payroll isn’t just paying someone their final wages — it’s handling notice pay, holiday pay, redundancy pay, tax rules, reporting to HMRC, and making sure nothing is missed that could come back to bite you later.
So let’s walk through the payroll steps that must happen during redundancy — calmly, clearly, and without pretending it’s “just another leaver”.
First Things First: Redundancy Is a Legal Process
According to Acas, redundancy occurs when a role is no longer needed — not when someone underperforms or everyone’s just had enough.
From a payroll point of view, this matters because redundancy triggers specific payments, specific tax treatment, and specific reporting requirements.
Payroll should be involved early — not five minutes before the final pay run.
Step 1: Final Pay (The Basics Still Matter)
Payroll must calculate and pay:
- Final salary or wages up to the leaving date
- Any outstanding overtime or contractual payments
- Payment in lieu of notice (if applicable)
This all goes through payroll as normal and is:
- Subject to PAYE tax
- Subject to National Insurance
- Reported via FPS to HMRC
So far, so familiar.
Step 2: Holiday Pay (Often Missed, Always Important) 🌴
Employees are entitled to be paid for unused statutory holiday up to their leaving date.
Payroll must:
- Calculate accrued but untaken holiday correctly
- Pay it in the final payroll run
- Tax it as normal pay
No guessing. No rounding because “it’s close enough”. Holiday pay errors are one of the most common redundancy disputes.
Step 3: Statutory Redundancy Pay (If Eligible)
If an employee has at least two years’ continuous service, they may be entitled to statutory redundancy pay.
This is based on:
- Age
- Length of service (capped)
- Weekly pay (capped by law)
Payroll’s role is to:
- Pay the redundancy amount
- Apply the correct tax treatment
Important bit:
👉 Statutory redundancy pay is tax-free up to £30,000, provided it’s a genuine redundancy payment.
It is not subject to National Insurance.
Get this wrong and you either:
- Over-tax the employee, or
- Under-report to HMRC
Neither ends well.
Step 4: Notice Pay (The Tricky One)
Notice pay is where payroll errors often creep in.
If the employee works their notice:
- It’s taxed and NI’d as normal pay
If you pay in lieu of notice (PILON):
- Most PILON payments are taxable and subject to NI
- HMRC expects them to be treated as earnings
Payroll must know:
- What the contract says
- Whether PILON is contractual or non-contractual
This affects tax treatment, and HMRC is very clear on this point.
Step 5: RTI Reporting & Leaver Documentation 📤
Payroll must:
- Submit an FPS including the leaving date
- Issue a P45 promptly
- Ensure year-to-date figures are correct
Redundancy payments must be reported accurately so HMRC understands:
- What was taxable
- What was tax-free
- What counts toward earnings
This is not the time for “we’ll fix it later”.
Step 6: Pensions & Final Contributions
Payroll must:
- Deduct final employee pension contributions (if applicable)
- Pay final employer contributions
- Report correctly to the pension provider
Redundancy does not remove pension obligations for the final pay period.
Step 7: Record-Keeping (Future You Will Thank You)
HMRC and Acas both expect employers to keep:
- Payroll records
- Redundancy calculations
- Payment breakdowns
For years.
Because questions often come long after emotions have settled.
What’s Changing in April 2026? 🆕
April 2026 brings wider day-one employment rights under new employment legislation. While statutory redundancy qualifying service is not currently changing, payroll should expect:
- Greater scrutiny around fairness and transparency
- Earlier involvement in employment processes
- Less tolerance for “we didn’t realise payroll needed to know”
In short: payroll will be expected to be involved earlier, not later.
❤️ The Love Payroll Bit
At Love Payroll Limited, we handle redundancy payroll carefully, accurately, and with empathy.
We:
- Calculate final pay properly
- Handle redundancy and notice pay correctly
- Apply the right tax treatment
- Submit clean RTI
- Support employers through a difficult process
Because redundancy is hard enough — payroll shouldn’t make it harder.
Final Thought 🧠
Redundancy isn’t just an HR process.
It’s a payroll process with legal, tax, and emotional consequences.
Get payroll involved early.
Check the details.
Don’t guess.
Because when redundancy payroll goes wrong, it’s not just a numbers problem — it’s a people problem.
