Is Redundancy Pay Tax-Free? The £30,000 Rule Explained
The first £30,000 of redundancy pay is completely free of income tax and National Insurance — this covers both statutory and any enhanced payment your employer adds.
What counts towards the £30,000?
- Statutory redundancy pay ✓
- Enhanced/contractual redundancy pay ✓
- Ex-gratia payments ✓
- Pay in lieu of notice (PILON) ✗ — this is taxable
- Holiday pay owed ✗ — taxable
Above £30,000
Any redundancy payment over £30,000 is subject to income tax at your marginal rate. There is still no National Insurance on the excess — just income tax.
Timing matters
If your redundancy payment takes you into the higher-rate band for the tax year, you may owe additional tax. Consider whether you can time the payment across two tax years.
Why the PILON distinction matters so much
Payment in lieu of notice is the single biggest reason people receive less than they expected. Since April 2018, the portion of any termination payment representing notice you would have worked is treated as earnings and taxed in full, whether or not your contract mentions PILON. HMRC calls this post-employment notice pay.
The practical effect is that an employer cannot reduce your tax by relabelling notice pay as redundancy. If you were entitled to three months' notice and did not work it, three months' pay is taxable regardless of what the settlement agreement calls it, and only what remains counts towards the £30,000.
Worked example
A settlement of £45,000 made up of £30,000 statutory and enhanced redundancy, £12,000 of unworked notice, and £3,000 of accrued holiday pay.
- £12,000 notice and £3,000 holiday pay are earnings. Income tax and both employee and employer National Insurance apply.
- £30,000 of genuine redundancy falls within the exemption, so no income tax and no National Insurance.
- Taxable in this example: £15,000, not the £15,000 above the headline £45,000 that people often assume.
Had the redundancy element been £40,000 instead, the extra £10,000 above the threshold would attract income tax at your marginal rate but still no National Insurance, which is what makes the redundancy element more valuable per pound than notice pay.
The tax year timing point, in practice
Redundancy usually means your income for the remainder of the tax year drops sharply. If you are made redundant late in a tax year, a large taxable element lands on top of a full year's salary and is likely taxed at higher rates. If the payment falls into the following tax year, it sits on top of only a few weeks of earnings and a full personal allowance.
Where there is any flexibility over the termination date, that difference can be worth thousands. It is a legitimate point to raise during negotiation, though the employer is under no obligation to accommodate it.
Emergency tax and reclaiming overpayments
Termination payments are frequently taxed through an emergency code, which assumes the payment is part of a regular monthly salary and therefore overtaxes it substantially. This is common and usually corrects itself, but not always quickly.
If you do not return to work in the same tax year, you may be owed a refund well before the year ends. HMRC's process for reclaiming tax after stopping work exists precisely for this, and waiting for an automatic correction can mean waiting months longer than necessary.
Pension contributions as an option
Some employers will pay part of a settlement directly into your pension instead of to you. Because employer pension contributions are not taxable earnings, this can shelter an amount that would otherwise be taxed at your marginal rate, subject to your annual allowance and any unused allowance carried forward.
Whether that is sensible depends entirely on whether you need the cash now, which after redundancy is often the deciding factor. It is worth knowing the option exists before agreeing terms rather than after.
Check your own figures
Use the redundancy pay calculator to work out your statutory entitlement, then compare it against the breakdown in your settlement to see which elements are genuinely redundancy and which are earnings in disguise.
General information, not tax or legal advice. Settlement agreements interact with notice rights, unfair dismissal protection and pension rules. Most employers fund independent legal advice as part of a settlement agreement, and it is worth using.