How to Calculate Redundancy When a Company goes into Administration

A director of a company entering into administration will be faced with a number of serious issues that will need resolving in the weeks and months to come. Dealing with the contracts of employees, and calculating redundancy when a company goes into administration is likely to be one of the most sensitive, and one of the most complicated. 

It is more important now than ever that you know what rights your employees have; that you understand how much it is expected of the company to pay them in the event of redundancy, and how you go about making such a calculation.

First published February 2022, last updated October 2026. 

What Does it Mean When a Company is in Administration?

When a company is in administration it means that it has a serious financial issue. This step may have been taken to stave off the threat of insolvency while regaining control over a difficult financial situation. Once a company has been placed into administration it has effectively been placed under the management of the administrator. 

Control of the company is ceded by directors to the administrator, who takes stock of the entire operation to assess the financial situation. They will devise a strategy to turn the firm around and repay all creditors. 

When placed into administration, a company is afforded some time to begin the process of coming up with a plan going forward. This is because all legal proceedings the company is faced with are put on hold as an official moratorium is placed on the business.

Employee Rights When a Company Goes into Administration

A company in administration must make several key decisions. Not least of these decisions revolve around the employees’ futures. Workers’ rights will  depend entirely on their status within the firm, the importance of their role, and when they were let go (if applicable). The timeframe of redundancy will decide which type of creditor they go on to become. 

An employee who is made redundant when a company goes into administration usually has a claim split between two categories of creditor: preferential for wage arrears and holiday pay up to the legal limits, and ordinary (unsecured) for anything above them. It is also important that you understand the rights of your employees in the event of the sale of your business as a going concern.

Ordinary Creditors 

Anything an employee is owed above the preferential limits, along with any claim for redundancy pay or notice pay, is an ordinary unsecured claim. Unsecured creditors are paid after secured creditors, the costs of the administration and preferential creditors, so these amounts are often paid only in part, if at all. In practice, most employees claim statutory redundancy pay, notice pay and capped wage arrears from the government’s Redundancy Payments Service rather than waiting for a dividend.

Preferential Creditors 

Arrears of wages of up to £800 per employee for the four months before the administration, and accrued holiday pay, are preferential. They are paid ahead of floating charge holders and unsecured creditors.

In the event of redundancy, any employee will receive money owed for the four months preceding the insolvency on a preferential basis, up to the limits above. Anything owed more than four months before insolvency will be handed out on an ordinary creditor basis.

 A preferential creditor is able to claim: 

• Any outstanding salary/commision (up to £800)
• Outstanding holiday pay up to six weeks
• Occupational pension payments (where applicable)

For more information on what a preferential creditor can claim, and for any guidance, contact us today.

Staff Transfer in the Event of Insolvency/Sale 

If the business is set to be sold as a going concern, any employment contracts can be transferred to the new buyer. All employee rights are protected under the rules of the Transfer of Undertaking (Protection of Employment) legislation — known as TUPE for short.

This means that should your company be sold while in administration, new owners are required to transfer existing employee contracts across. All terms and conditions are also expected to be left unaltered, carried over, and fulfilled. These can include: 

• Wages 
• Holiday entitlement 
• Hours expected to work 
• Outstanding payments

Calculating Redundancy Payments When a Company Goes into Administration 

A member of staff that has been employed for two continuous years prior to administration/liquidation is eligible for statutory redundancy pay. This payment is tax-free up to £30,000. The amount of the payment is calculated depending on age and length of contract. These calculations only consider the last 20 years of employment. 

Redundancy payments are calculated as follows:

• Under 22: Employees in this band are entitled to half a week’s pay for every year they have been under the company’s employment.
• Aged 22-40: This band allows for one week’s worth of wage for every year. 
• Aged 41 and over: These employees are eligible for one and a half weeks’ wage for each year of employment.

For redundancies on or after 6 April 2026, weekly pay is capped at £751, so employees earning more than this have their redundancy pay calculated on the capped figure. The maximum statutory redundancy payment is £22,530.

If employee pay differs week to week then the amount owed is calculated by getting an average amount using the last 12 working weeks prior to redundancy. 

Any calculation of redundancy payment should be shared with employees and should include any overtime/bonuses/commissions stated in their contracts.

To receive redundancy pay when a company goes into administration, employees have six months from the date their job ends to claim. Where the employer is insolvent, the claim is made through the government’s Redundancy Payments Service, which pays statutory redundancy pay and capped arrears of wages and holiday pay.

Not everybody applies for redundancy payments. Those not applicable include the following: 

• Employees who refuse an offer to keep them on, or an offer of suitable alternative work, without good reason
• Any employees dismissed for misconduct 
• Crown servants, members of the armed forces, and employees of the Police 
• Apprentices who are not employees at the end of their training 

Employee redundancy payments must be paid no later than their final payday unless an agreement has been reached in writing for an extension. Any failure to pay not agreed by both parties could lead to an employment tribunal and more serious sanctions.

How Inquesta Helps with the Company Administration Procedure

Going into administration has a reputation as a bad thing for a business and its employees. The reality is that it represents an opportunity for the company to secure its long-term future, with the hope that all employees can be retained in the process. 

However, redundancies may be inevitable if the financial difficulties are severe enough. As a result, it is important that you understand exactly how to calculate redundancy when your company goes into administration so you can do the right thing by your employees; as well as safeguard your business against any further sanctions due to poor redundancy practice. 

Inquesta’s team of insolvency practitioners have decades of experience supporting businesses through the administration process, and even acting as administrators on their behalf. 

Get in touch with one of our expert insolvency practitioners today for assistance with redundancy payments, as well as guidance with various aspects of corporate recovery and insolvency; from liquidation to business recovery and more. For more information book a free consultation or contact our team.