Do You Pay Tax on Redundancy Pay? The £30,000 Rule

Is redundancy pay taxed in the UK?

Redundancy pay is tax free up to a combined total of £30,000. Income tax applies to anything above that. The exemption applies to the total of qualifying termination payments from the same employment, not separately to each payment you receive.

The label on a payment does not decide its tax treatment. The question is whether the money compensates you for losing your job or represents earnings you were entitled to under your contract. Compensation can fall inside the exemption. Earnings are taxed in full.

What counts towards the £30,000 tax free redundancy amount?

Statutory redundancy pay counts towards the £30,000. It is not a separate allowance, and an enhanced scheme stacks on top of it against the same single limit.

Non-cash items count at their cash equivalent. A company car, laptop or phone you keep after your leaving date uses up part of the exemption.

Three things in a redundancy package are not taxed at all and do not use up the £30,000:

• Employer contributions to a registered pension scheme made as part of your termination payment, subject to the annual allowance.
• Legal costs relating to the settlement that your employer pays directly to your solicitor.
• A termination payment made because of an injury, illness or disability that prevents you from continuing to do your job.

The most common error we see on settlement paperwork is an employer treating the £30,000 as available after statutory redundancy pay, rather than inclusive of it. Before you sign, check the schedule of payments and confirm that statutory redundancy, enhanced redundancy and any ex gratia sum have been added together against one £30,000 limit.

Is pay in lieu of notice (PILON) taxed?

PILON is always taxed as earnings. It attracts income tax and National Insurance in full and never enters the £30,000 exemption, whether or not your contract contains a PILON clause.

Since 6 April 2018, HMRC applies post-employment notice pay rules to every relevant termination award. PENP is the minimum slice of your package that must be treated as notice pay when you do not work your notice. It stops an employer from relabelling notice pay as tax free compensation.

How post-employment notice pay is calculated

PENP is set out in section 402D of the Income Tax (Earnings and Pensions) Act 2003. HMRC gives the formula in its Employment Income Manual at EIM13880:

PENP = ((BP × D) ÷ P) − T

• BP is your basic pay in the last pay period ending before the trigger date, excluding overtime, bonus, commission, gratuities, allowances and taxable benefits.
• D is the number of calendar days in the post-employment notice period.
• P is the number of calendar days in that last pay period.
• T is any termination payment already taxable as earnings, such as a contractual PILON.

Two rules are easy to miss. If the formula produces a negative figure, PENP is nil. If it produces a figure larger than the relevant termination award, PENP is capped at that award.

PENP does not apply to statutory redundancy pay. Garden leave is different again: you remain on the payroll, so the pay is ordinary salary and is taxed as normal.

How is redundancy pay over £30,000 taxed?

Anything above £30,000 is added to your income for the year and taxed at your marginal rate. In England, Wales and Northern Ireland the 2026 to 2027 rates are 20 per cent, 40 per cent and 45 per cent. Scottish taxpayers use the separate Scottish rates, which run from 19 per cent to 48 per cent. See how the income tax bands apply to your total income.

You pay no employee National Insurance on a qualifying termination award, including the taxable excess above £30,000.

Your employer does pay. Class 1A National Insurance is charged at 15 per cent on termination awards above £30,000 for 2026 to 2027. Unlike Class 1A on benefits in kind, this charge is reported and paid through payroll during the tax year rather than through a P11D.

That 15 per cent matters in negotiation. Every extra £1,000 of ex gratia compensation above the threshold costs the employer £1,150, which is often why a headline figure will not move. An employer pension contribution can sometimes deliver more value for the same employer cost, because it is free of income tax and National Insurance on both sides. Whether that works depends on your annual allowance and your cash needs.

Worked example: a £45,000 package with notice not worked

Of the £45,000, £30,000 is tax free. The taxable amount is £15,000: the £10,000 PENP plus the £5,000 excess. Only the £10,000 PENP carries employee National Insurance. The £5,000 excess carries none, although the employer pays £750 in Class 1A on it.

How is tax deducted from redundancy pay on your final payslip?

Your employer runs the taxable elements through payroll and deducts income tax and National Insurance under PAYE. You do not pay anything separately. The deductions appear on your final payslip.

If the payment reaches you after your P45 has been issued, your employer must use an 0T tax code. Tax is then deducted on the assumption that your personal allowance is already used, so the deduction is often higher than your final liability.

Leaving part way through a tax year frequently produces an overpayment, because PAYE assumes your earnings would have continued for the rest of the year. If you do not start a new job immediately, that overpayment can be significant.

To check your position:

1. Compare your final payslip and P45 against the schedule of payments in your settlement agreement.
2. Confirm that statutory redundancy pay has not been put through as taxable, and check the figure treated as PENP.
3. Review your tax position in your HMRC personal tax account.
4. Claim any refund from HMRC directly. You do not need to pay a third party to reclaim overpaid PAYE.

If you complete a Self Assessment return, report the termination payment in the additional information section. Check what else belongs on your Self Assessment return.

How much statutory redundancy pay will you get in 2026 to 2027?

You qualify for statutory redundancy pay if you are an employee with two years or more of continuous service with your current employer. The calculation uses your age, service and weekly pay:

• Half a week’s pay for each full year worked while under 22.
• One week’s pay for each full year worked while aged 22 to 40.
• One and a half weeks’ pay for each full year worked while aged 41 or over.

Service counts for a maximum of 20 years. For redundancies on or after 6 April 2026, weekly pay is capped at £751, giving a maximum statutory payment of £22,530. Weekly pay is the average you earned over the 12 weeks before the day you received your redundancy notice.

Because the statutory maximum sits below £30,000, statutory redundancy pay on its own is never taxed. The GOV.UK statutory redundancy pay calculator gives your exact entitlement.

Special cases worth checking

Payments split across tax years. Only one £30,000 exemption applies to the employment. If instalments straddle two tax years, the exemption is used up by the earlier payments first, and the balance of later payments is taxable in the year received.

A second redundancy from an unconnected employer. A separate employment carries its own £30,000 exemption. Payments from associated employers are treated as connected and share one exemption.

Non-residents, seafarers and armed forces personnel. Part of a termination payment may be tax free on a different basis if you were non-resident for the whole tax year in which the employment ended, work at sea, or serve in the armed forces.

Directors and owner-managers. A compensation label must be supportable by the facts. HMRC will look at whether the payment genuinely compensates for loss of office rather than rewarding past work or replacing a bonus.