Terminating an Employee in the UK: The Steps and How Severance Is Calculated

In the UK, the statutory payout for a dismissal is usually the small number, and the tribunal risk is the big one. Statutory redundancy pay is modest and capped: for 2026/27 a week's pay counts for at most £751, so the largest possible statutory redundancy payment is £22,530, even for a long-serving, high-earning employee. What actually costs money is getting the process wrong and losing an unfair-dismissal claim, where the compensatory award for 2026/27 can reach £123,543. So in the UK the real work of a termination is procedural: having a fair reason and following a fair process, because that is what separates a modest, predictable cost from a large, contested one. A major change also lands in 2027: unfair-dismissal protection will begin at six months of service instead of two years, and the cap on tribunal awards will be removed, which I return to at the end.

The fair-dismissal framework

UK law recognizes five potentially fair reasons to dismiss: capability or performance, conduct, redundancy, illegality (for example a driver who loses their license), and "some other substantial reason." A dismissal is fair only if it is for one of those reasons and the employer acted reasonably, which means following a fair procedure as well as having a fair reason. The two are tested separately, and a good reason handled through a bad process can still be an unfair dismissal.

One feature currently shapes everything: ordinary unfair-dismissal protection applies only after two years of continuous service. Below two years, an employer can dismiss without that exposure, though claims that need no qualifying period (discrimination, whistleblowing, pregnancy, asserting a statutory right) still apply from day one. That two-year qualifying period is the part that changes in 2027.

Notice periods

Statutory minimum notice is one week once the employee has a month's service, then one week for each complete year, up to a maximum of twelve weeks at twelve years. A contract can promise more, never less. An employer can end the employment immediately and pay in lieu of notice (a PILON), but since 2018 all payments in lieu are taxable as earnings, so a PILON no longer benefits from the tax-free treatment that other termination payments can get.

Statutory redundancy pay

An employee with two or more years of service who is made redundant is entitled to statutory redundancy pay, on a formula set by age band. Each complete year of service counts as half a week's pay for years worked under age 22, one week's pay for years worked between 22 and 40, and one and a half weeks' pay for years worked at 41 and over. The count is capped at twenty years, and a week's pay is capped at £751 for 2026/27, which is what produces the £22,530 maximum.

A worked example makes the size clear. Take an employee aged 56 with fifteen years of service earning £600 a week. Their weekly pay is below the £751 cap, so it is used in full. All fifteen years were worked after age 41, so each counts as one and a half weeks: 15 × 1.5 × £600 = £13,500. If the same employee earned £900 a week, the £751 cap would apply instead, giving 15 × 1.5 × £751 = £16,897.50. The formula rewards age and service, and the cap keeps even large cases bounded.

Redundancies at scale add a consultation duty. Twenty or more redundancies at one establishment within 90 days require collective consultation with employee representatives for at least 30 days before the first dismissal; 100 or more require at least 45 days. The employer also has to notify the government in advance using form HR1. Skipping collective consultation exposes the employer to a protective award of up to 90 days' pay per affected employee, which is uncapped, so this is not a corner to cut.

The ACAS Code and the cost of an unfair dismissal

For conduct and performance dismissals, the ACAS Code of Practice sets the fair process: investigate, put the concerns to the employee in a hearing, let them be accompanied, and give a right of appeal. A tribunal can increase or decrease an award by up to 25 percent for an unreasonable failure to follow the Code, so the process has a direct price.

An unfair-dismissal award has two parts. The basic award is calculated exactly like statutory redundancy pay, using the same age bands and the same £751 weekly cap. The compensatory award covers actual financial loss, mainly lost earnings, and is capped for 2026/27 at the lower of £123,543 or 52 weeks' gross pay. That compensatory figure, not the redundancy pay, is the number that makes UK dismissals expensive when they go wrong.

Gross misconduct is the one case where an employer can dismiss summarily, without notice or pay in lieu. Even then a fair procedure is still required; "gross misconduct" is a reason to skip the notice, not a reason to skip the investigation and hearing.

Settlement agreements

Where an employer wants certainty, the route is a settlement agreement: the employee waives their claims in exchange for an agreed payment. For it to be binding, the employee must take independent legal advice on the terms, and the adviser has to be named. This is the mechanism that converts an open tribunal risk into a fixed, agreed cost, which is often why an employer pays more than the statutory minimum to close a matter cleanly.

Final pay and accrued holiday

On any exit the employer owes final salary to the last day and a payment for accrued but untaken statutory holiday, which is 5.6 weeks a year, calculated pro-rata to the point of leaving under the Working Time Regulations. Accrued holiday pay is ordinary taxable earnings and does not get the tax-free treatment described next.

How termination payments are taxed

This is where UK terminations have a real planning element. The first £30,000 of a genuine termination payment, such as statutory or enhanced redundancy pay or an ex-gratia sum, is free of income tax and National Insurance. Statutory redundancy pay, capped at £22,530, always falls within that £30,000. Anything above £30,000 is subject to income tax and to employer National Insurance at 15 percent (an employer-only charge).

The important carve-out is pay in lieu of notice. Since 2018, the portion of a package that represents notice pay, calculated under the "post-employment notice pay" rules, is fully taxable as earnings and cannot use the £30,000 exemption, even where there is no contractual PILON clause. Ordinary salary, accrued holiday, and contractual bonuses are likewise fully taxable. In practice this means a large settlement is rarely all tax-free: the notice element and earned pay are taxed, and only the genuine compensation for loss of the job uses the exemption.

Small predictable payouts, costly mistakes, and the 2027 change

Two things define the UK picture: the mechanical payments are small and predictable, while the cost of a mishandled dismissal is large and, for now, capped. The statutory redundancy formula is bounded by the £751 weekly cap and the £22,530 ceiling; the danger is the compensatory award and the 25 percent ACAS uplift, both of which turn on process.

That balance changes at the start of 2027. Under the Employment Rights Act 2025, the qualifying period for ordinary unfair dismissal drops from two years to six months, and the cap on the compensatory award is removed. In plain terms, far more employees will be able to bring an unfair-dismissal claim far sooner, and the ceiling that currently limits those awards will be gone. UK employers should plan their dismissal procedures and budgets for more claims, brought sooner, with no cap on the award.

Getting the numbers right comes down to calculation and a tax split: the age-banded redundancy figure against the current weekly cap, the notice period by tenure, the accrued-holiday payout, and dividing a settlement into its taxable and tax-free parts under the post-employment notice-pay rules. Flux does that correctly, applying the 2026/27 caps so the £30,000 exemption and the taxable notice and earnings each come out right.