Making someone redundant is one of the hardest things a small employer has to do, and one of the easiest to get wrong. The rules are not complicated, but skipping a step can turn a genuine redundancy into an unfair dismissal claim. This guide covers what counts as redundancy, how to select people fairly, what you must pay, and the changes to employment law that are on the way.

What counts as redundancy

A dismissal is a redundancy when you no longer need anyone to do a particular job. That might be because the business is closing, moving, or changing what it does or how it works. The job has to be disappearing. Replacing one person with another, or dismissing someone because you are unhappy with their work, is not redundancy.

Redundancy also covers lay-offs and short-time working. This guide focuses on dismissal, which most small employers face.

Look for alternatives first

Redundancy should be a last resort. Before you start, consider what else would solve the problem.

If you decide redundancy is unavoidable, check your cash position before committing. Statutory redundancy pay and notice are due soon after dismissal, so a realistic cash flow forecast will show whether you can afford them.

Selecting people fairly

If several people do similar jobs, you need to decide who is at risk and how to choose between them. This is where most claims start.

• Define the pool. Include everyone doing the same or similar work, not just the person you had in mind.
• Use objective criteria. Skills, qualifications, experience, performance records and disciplinary history can all be reasonable, if you can back them up with evidence.
• Score everyone the same way. Write the criteria down, apply them to everybody in the pool, and keep the scores.
• Avoid criteria that discriminate. Don’t use sickness absence caused by disability, absence for maternity or parental leave, or part-time status.

“Last in, first out” is simple, but it can be indirectly discriminatory against younger workers. Using it alone is risky. Let the employee see their own scores and give them a chance to challenge them.

Consultation

Consultation is the step that small employers most often skip, and skipping it makes a redundancy almost certainly unfair. GOV.UK says as much.

Fewer than 20 redundancies. There is no fixed minimum period, but you should hold genuine one-to-one meetings. Explain the business reason, share the selection criteria and the individual’s score, ask for ideas to avoid redundancy, and consider alternatives. Consultation has to take place while the decision is still open to change. Telling someone the outcome and calling it consultation doesn’t count. Let the employee bring a colleague or representative, and confirm the outcome in writing.

20 or more redundancies at one establishment within 90 days. Collective consultation applies. You must consult elected employee representatives or a recognised trade union, and notify the Redundancy Payments Service on form HR1 before consultation begins. The minimum period before the first dismissal is 30 days for 20 to 99 redundancies and 45 days for 100 or more. An employer that fails to notify can face an unlimited fine, and the maximum protective award for failing to consult collectively rose from 90 to 180 days’ pay for dismissals on or after 6 April 2026.

Most small businesses will not reach 20 redundancies. If you are anywhere near that number, take advice before announcing anything.

Suitable alternative employment

You must look for another suitable job within your business, or an associated company, for the person at risk. If a suitable vacancy exists and you don’t offer it, the dismissal may be unfair.

Whether a job is suitable depends on the type of work, the pay, hours, status and location, and the person’s skills and circumstances. Employees who are pregnant, or on or just back from maternity, adoption or shared parental leave, have extra protection and must be offered a suitable vacancy ahead of others. Our guide to maternity and paternity pay covers the wider rules.

• Trial period. Anyone who accepts a different role has a statutory four-week trial. The period can be longer if you agree in writing, for example to allow for retraining.
• If it doesn’t work out. The employee can leave during the trial and keep their right to redundancy pay. If they stay beyond it without giving notice, they lose that right.
• Unreasonable refusal. An employee who unreasonably turns down a suitable role may lose their entitlement to statutory redundancy pay.

Notice and time off to look for work

Employees are entitled to at least the statutory minimum notice, or more if their contract says so. You can pay in lieu of notice if the contract allows it, or if the employee agrees.

Employees with at least two years’ service are also entitled to reasonable paid time off during their notice to look for work or arrange training. Agree this sensibly with them. The statutory cap on what you must pay for this time is modest, but refusing time off altogether leaves you open to a claim.

Redundancy pay

Employees with at least two years’ continuous service are entitled to statutory redundancy pay. Employees with less than two years aren’t entitled to it, although you can choose to pay something.

Only the last 20 years of service count. A week’s pay is capped at £751, and the maximum statutory payment is £22,530. Weekly pay is the average over the 12 weeks before notice was given.

You must pay on dismissal, or soon after, and give the employee a written statement showing how the figure was calculated. Many small businesses also owe notice pay and accrued holiday pay, so build all three into your costings. Employees can challenge the calculation, and you should make sure any enhanced contractual terms are honoured.

Tax on redundancy payments

Statutory and contractual redundancy payments are free of income tax up to £30,000 in total across the termination package. Anything above that is taxable, and employer National Insurance is due on the excess. Pay in lieu of notice that is contractual, or that you routinely make, is taxed in the usual way through payroll. Holiday pay and wages owed up to the leaving date are also taxable. The rules are technical, so talk to your accountant before agreeing a package. Our guide to PAYE for small business owners explains the payroll side, and if you need help finding an adviser, see how to choose an accountant.

Changes to the rules

Employment law is changing, and some of it affects redundancy directly. The dates have already moved more than once, so check GOV.UK before relying on any of them.

• Already in force. From 6 April 2026 the weekly pay cap rose to £751 and the maximum protective award for collective redundancy failures doubled to 180 days’ pay.
• Expected from 1 January 2027. The qualifying period for ordinary unfair dismissal is due to fall from two years to six months, for dismissals taking effect on or after that date, and the cap on the compensatory award is due to be removed. If you are considering redundancies near the turn of the year, timing could affect who can bring a claim.
• Expected later. Fire and rehire is due to become automatically unfair, and further changes to collective redundancy thresholds are expected from 2027.

The practical lesson is the same whatever the dates turn out to be. Follow a fair process with every employee, however long they have worked for you.

Common mistakes

Useful resources

• GOV.UK — redundancy pay for employers
• GOV.UK — redundancy consultations
• GOV.UK — notice periods
• GOV.UK — suitable alternative employment
• Acas — redundancy guidance for employers
• Our guide to hiring your first employee — the paperwork to have in place
• Our guide to PAYE for small business owners — the payroll side of a termination