Last updated: June 2026
Redundancy pay in Australia is calculated using one formula: weekly base rate of pay multiplied by a number of weeks set by years of continuous service, under the National Employment Standards (NES) in the Fair Work Act 2009.
That’s the starting point for any redundancy pay calculator Australia employers use. But the formula alone isn’t enough. Employers also have a second obligation: processing the payment correctly through payroll so the Australian Taxation Office (ATO) receives the right withholding and reporting.
Get either step wrong and the consequences are real:
- Underpaying creates wage theft exposure
- Miscategorising the payment produces incorrect withholding, which the ATO can investigate and reverse
This article covers both halves: the NES formula, and the ATO tax treatment that determines how much of the payment is tax-free.
Who Is Entitled to Redundancy Pay?
A genuine redundancy occurs when an employer permanently eliminates a position and no one else fills the role.
To qualify under the NES, an employee must:
- Have completed at least 12 months of continuous service
- Be employed by a business with 15 or more employees
- Not be a casual, apprentice, or fixed-term trainee
Small businesses with fewer than 15 employees are exempt from NES redundancy obligations, though a Modern Award or enterprise agreement may still apply. Staying across recent payroll compliance updates is essential before any termination decision is finalised.
What Is the NES Redundancy Pay Formula?
The formula is straightforward: weekly base rate of pay multiplied by the number of redundancy weeks determined by years of continuous service.
The base rate includes ordinary hours of work only. Employers must exclude:
- Overtime payments
- Bonus and incentive payments
- Penalty rates and loadings
- Allowances
- Superannuation contributions
Including excluded components in the base rate is one of the most common payroll errors at termination. If the calculation is challenged, the employer carries the liability.
The Fair Work Ombudsman publishes the NES redundancy pay scale, which operates as follows:
| Years of continuous service | Redundancy pay period |
| 1 year < 2 years | 4 weeks |
| 2 years < 3 years | 6 weeks |
| 3 years < 4 years | 7 weeks |
| 4 years < 5 years | 8 weeks |
| 5 years < 6 years | 10 weeks |
| 6 years < 7 years | 11 weeks |
| 7 years < n 8 years | 13 weeks |
| 8 years < 9 years | 14 weeks |
| 9 years < 10 years | 16 weeks |
| 10 years or more | 12 weeks |
These are minimum entitlements. An applicable Modern Award, enterprise agreement, or employment contract may prescribe higher amounts. Managed payroll services include a review of the applicable industrial instrument before processing any termination.
Why Does Redundancy Pay Drop at 10 Years?
The table above has a deliberate reduction that catches payroll teams out.
An employee with 9 years and 11 months gets 16 weeks. An employee who crosses 10 years gets only 12 weeks. This isn’t a legislative error. It reflects that long service leave typically becomes accessible around the same threshold.
Two errors happen in practice:
- Applying 16 weeks to an employee with 10+ years, creating an overpayment that’s hard to recover
- Applying 12 weeks to an employee just under 10 years, creating an underpayment the employee can claim
Reliable payroll compliance processes flag service duration before the calculation runs, not after.
How Does the ATO Tax Redundancy Pay?
This is where most redundancy pay calculator Australia searches go wrong. The NES tells you what to pay. The ATO rules tell you how to tax it, and these are separate calculations.
For 2025-26, the tax-free threshold for a genuine redundancy payment is:
$13,100 + ($6,552 x completed years of service)
Only completed full years count. Partial years don’t add to the threshold.
Example: an employee with 6 completed years has a tax-free threshold of $13,100 + ($6,552 x 6) = $52,412. If the redundancy payment is below this, no withholding applies to that portion.
Anything above the threshold becomes an Employment Termination Payment (ETP), taxed at concessional rates up to the ETP cap of $260,000 for 2025-26.
A non-genuine redundancy, such as dismissal at pension age or voluntary departure, gets no tax-free component. The whole payment is taxed as an ETP. The ATO can reclassify a payment as non-genuine if the employer can’t show the position was permanently abolished.
PAYG withholding applies to ETP components at the time of payment, and the employer must issue a separate ETP payment summary.
What Else Must Be Paid at Termination?
Redundancy pay is one component of a final termination package. It sits alongside:
- Outstanding wages: All ordinary wages owed for hours already worked, taxed at the employee’s marginal rate through the normal payroll cycle
- Notice or payment in lieu: The NES notice period based on length of service (plus one additional week for employees over 45 with two or more years of service), taxed as income
- Accrued annual leave: Paid out at the applicable rate under ATO Schedule 7, with separate tax treatment depending on whether it was accrued pre- or post-1993
- Accrued long service leave: Payable where applicable under state or territory law, also subject to Schedule 7 treatment
Each of these components must be calculated and reported separately. Bundling them into a single gross payment without correct classification produces incorrect superannuation obligations and STP reporting, and creates the conditions for an ATO audit query.
Employers operating in New South Wales can find jurisdiction-specific processing support through Sydney payroll operations that handle state-level compliance alongside national obligations.
How Managed Payroll Operations Handle Redundancy Processing
A redundancy payment touches five things at once: the NES entitlement, the ATO tax classification, the STP lodgement, the ETP payment summary, and the final payslip. All within strict timeframes.
Procloz manages redundancy processing as part of its Australian payroll operations. This covers verifying service dates, identifying the applicable industrial instrument, applying the correct base rate, classifying the payment under ATO guidelines, and submitting the required STP and ETP reporting.
For businesses going through a restructure, this removes the risk of misclassification and ensures the final pay package is calculated and lodged correctly the first time.
Contact us for assistance now.
Redundancy Pay Calculator Australia: Frequently Asked Questions
Q: Who is exempt from paying NES redundancy pay in Australia?
A: Small businesses with fewer than 15 employees are exempt from NES redundancy obligations. Casual employees, apprentices, and employees on fixed-term contracts are also excluded from NES redundancy entitlements. Always check the applicable Modern Award.
Q: What is the tax-free limit for genuine redundancy pay in 2025-26?
A: The 2025-26 tax-free limit is $13,100 plus $6,552 for each completed year of service. Amounts exceeding this threshold are treated as an ETP and taxed at concessional rates by the ATO.
Q: Does redundancy pay include overtime or bonuses in Australia?
A: No. Redundancy pay is calculated on the base rate for ordinary hours only. Overtime, bonuses, allowances, penalty rates, and superannuation contributions are all excluded from the calculation under the NES.
Q: Why does redundancy pay drop from 16 weeks to 12 weeks at 10 years?
A: The NES intentionally reduces entitlement at 10 years because long service leave typically becomes accessible at this threshold. The 12-week figure reflects the combined intent of both entitlements under Australian law.
