Why do companies offer severance packages?

When redundancy is on the cards or there’s a tranche of job losses, it can be an unsettling time for all in the organisation. Offering severance packages reduces legal risk, protects a company’s reputation, sustains morale among remaining workers, attracts top talent, and smooths organisational restructures.

A severance package is a collection of financial payments and benefits that is offered to a member of staff when they finish working for the company, normally due to layoffs because the business is going through a restructure or period of change.

Severance packages differ from country to country, but in the UK they typically include:

• Statutory redundancy pay – the minimum amount which an employer is legally required to pay those employees who are eligible.
• Notice pay, or PILON (payment in lieu of notice) – the normal salary paid during the notice period.
• Enhanced redundancy pay –  additional remuneration above the minimum.
• Outplacement support – including benefits such as CV advice, career coaching, and interview preparation.

It’s a hard fact that redundancies and job losses are part of any organisation’s change. Whether this is because of automation, economic pressures, mergers and acquisitions, or a restructuring programme, there is sometimes a need to reduce the size of the workforce. If or when this happens, employers offer severance packages to exiting employees that go beyond the minimum requirement.

It’s not just about settling financially with departing workers, it can also be seen as a strategic move that combines legal requirements with protecting the company reputation and looking after the wellbeing of employees.

The Office for National Statistics (ONS) found that, from October to December 2025, there was a redundancy rate of 4.9 per 1000 employees, and the way in which businesses manage redundancies can have a lasting effect on morale and legal risks. It might seem over the top to offer more than the legal requirement, so let’s take a look at why companies offer severance packages to those staff members who are leaving.

UK employers must comply with employment laws during the layoff or redundancy process, otherwise there could be serious consequences. For example, if a worker feels they’ve been mistreated during this process, they can sue for unfair dismissal, discrimination, or failure on the part of the company to follow the right consultation procedures, such as not holding exit interviews.

Offering a comprehensive severance package can reduce any legal risks or expensive tribunals, as the cost of severance payment will most likely be much lower than legal fees and associated reputational damage. Offering a severance package usually comes with the proviso that employees agree to give up any legal rights to pursue a claim at an employment tribunal.

When employees are leaving and being offboarded from the company, it won’t come as a huge surprise to learn that the rest of the affected department or office will notice what’s going on, and be concerned. If redundancies are handled poorly, there is a high chance that departing members of staff might vent their feelings online or to anyone who will listen.

To combat that, offering a fair severance package will assuage this and show to remaining staff, as well as the public and relevant clients or customers, that this is the sort of company that values its workers, even when they’re leaving. This can also have a knock-on effect with retaining talent and influencing recruitment at a later date.

With redundancies on the cards, while it’s worse for those it affects directly, it’s also unsettling for those workers who aren’t in the firing line. Providing severance packages for departing employees offers reassurance to remaining staff, as it shows that the business acts ethically and responsibly. This can help with sustaining trust and engagement throughout those difficult periods of change.

Generally, people are averse to change. A business restructuring process often requires staff to cooperate during handovers, consultation periods, and transitional projects. If the company is seen to provide severance packages, this can aid collaboration and reduce resistance during these times.

There are some sectors that use the offer of severance packages as part of a wider employee value proposition. For example, the finance, professional services, and technology industries often incorporate policies on severance in contracts or for leadership roles. Offering these packages reassures top talent that they will be supported if their position becomes redundant.

There is no legal requirement for companies to offer severance packages in the UK. However, statutory redundancy pay is required if exiting employees meet certain criteria. It will usually be granted if an employee has been with the company for at least two years, with the length of service capped at 20 years. If that’s the case, they will receive:

• Half a week’s pay for every full year of work if they are under 22.
• One week’s pay for each full year if they are 22 or older, but less than 41 years of age.
• One and half week’s pay for every full year if they are 41 or older.

There are exceptions to the above, and they are not entitled to statutory redundancy pay if they are offered suitable alternative work that is refused without a valid reason.

Because these payments are fairly modest, a lot of companies provide enhanced redundancy packages on top of what is legally required.

It might not always be possible to negotiate on a severance package as many of them are standardised, but there is sometimes some wiggle room. Employees might be able to negotiate on:

• Notice period payments, if the job contract allows payment in lieu of notice.
• Entitlements to upcoming bonuses, especially if they were expected or earned.
• Positive references, which can make or break their ability to secure a new role.
• Outplacement services, which usually include CV help and / or career coaching.

From the employer’s perspective, having clear and honest conversations around the ins and outs of severance packages in order to reach mutually acceptable outcomes can avoid any disputes in the long run.

While these two terms are often interchangeable, there are some differences. Understanding these is vital for the employees who are affected and for the employers who are collating the exit packages.

For those being made redundant, their employer is required, by law, to pay them a statutory redundancy payment, as long as they have been at the company for over two years. The actual amount is calculated through a formula defined by the UK government, based on age, length of service, and salary.

This is a broader, more informal term, with no legal standing, and normally describes the whole package that an exiting employee will receive when leaving the company. This will include the redundancy pay, which is part of a severance package, if the employer is offering beyond the statutory requirement.

Put another way, redundancy pay is one component, with severance being the whole package.

It’s essential that HR leaders understand the difference between voluntary and statutory severance in the UK.

As previously explained, this is the legal minimum requirement that an employer must pay to an employee who has been made redundant, and is part of UK employment law.

Also known as enhanced severance, this goes beyond the minimum requirement, but is unique to each company as it’s not bound by law. It might include:

• A lump sum payment.
• Protection of an upcoming bonus.
• Extension of benefits, such as health insurance.
• Multiples of salary, for example a months’ pay per year of service, instead of the statutory one or one and a half weeks’.
• Outplacement services.

Myth: every departing employee receives a severance package.

Reality: the only guarantee for an eligible employee is receiving statutory redundancy pay, as severance packages are down to the specific employer.

Myth: a severance package is reserved only for senior members of a team.

Reality: while leaders might receive more lucrative packages, severance can be offered to all levels across an organisation.

Myth: there is no negotiation allowed.

Reality: while some packages might be set in stone, others are more flexible with room for negotiation.

Healthcare sector

The National Health Service (NHS) is a well-known example of structured redundancy and severance packages within the public sector. Under the health service policies, employees secure redundancy payments that often significantly exceed statutory minimums, based on salary and length of service. One example is NHS redundancy payments reaching up to 24 months’ pay in certain circumstances, depending on service and contractual terms.

These extra provisions are in place to reflect the long tenures of many NHS staff and to support them during workplace transitions and restructuring within the healthcare system.

Technical sector

Major tech firms often provide enhanced severance packages for employees who are facing layoffs. For those tech companies who have announced redundancies recently, packages have included several months’ salary, bonus protection, extended healthcare, and outplacement support with career transitioning. For example, global giant Amazon has recently slashed jobs, both globally and across the UK, with affected staff receiving continued pay, benefits, and severance support during the transition periods.

These severance packages help to mitigate reputational damage, while simultaneously supporting employees to secure new positions.

Severance packages do have specific tax implications in the UK. The first £30,000 of a genuine redundancy payment is normally tax-free, with payments above that threshold subject to tax. Having said that, not all payments qualify for this exemption, with payment in lieu of notice being taxed, and bonuses taxed as income. Check out HMRCs guidance on termination pay for more information on this.

When redundancies can’t be avoided, the question for HR and business leaders is not whether it’s right to offer severance, but what kind of exit experience they want their organisation to be known for.Careerminds can help with an array of outplacement packages and career enablement services. Contact us today to find out more.