Is redundancy pay taxable? Yes, but only above a set limit. The first £30,000 is free of Income Tax and employee National Insurance entirely.

Anything over that amount is taxed at your normal Income Tax rate, though still with no National Insurance to pay. Notice pay, holiday pay and any bonus owed are different: these are treated as normal earnings and taxed in full, regardless of the total package.

Table of Contents

Is redundancy pay tax free?

Redundancy pay is tax free up to £30,000. Above the limit, HMRC treats the payment as compensation rather than earnings, which is why it gets its own rules instead of standard PAYE treatment.

The £30,000 tax-free limit applies to the whole payment, not just the statutory element. Whether your employer calls it statutory redundancy, enhanced redundancy or voluntary redundancy makes no difference. What matters is whether the payment genuinely compensates you for losing your job, not for work you’ve already done.

Anything else bundled into your final pay packet, such as notice pay or unused holiday, gets taxed as normal income. Here’s how the main payments break down:

Payment type Income Tax National Insurance
Redundancy pay (up to £30,000) Tax-free None
Employer pension contribution Tax-free (subject to annual allowance) None
Redundancy pay (above £30,000) Taxed at your marginal rate None
Notice pay (PILON) Taxed as earnings Applies as normal
Holiday pay Taxed as earnings Applies as normal
Bonuses or commission Taxed as earnings Applies as normal

How does the £30,000 tax-free limit work?

The £30,000 limit applies once per employment, not once per payment. If your package includes several sums, such as a statutory payment plus an ex gratia top-up, they’re added together against the same allowance. You don’t get a fresh £30,000 for each element.

Non-cash benefits count too. A company car, private health cover, or a phone you’re allowed to keep all get a cash value, added to your payout. A £28,000 payment plus a £5,000 car is a £33,000 package for tax purposes, and £3,000 of it gets taxed

Does voluntary redundancy get the £30,000 tax-free allowance?

Yes. Volunteering for redundancy doesn’t change the tax position. If the payment genuinely compensates you for losing your job, rather than rewarding work you’ve done, it qualifies for the same £30,000 exemption as compulsory redundancy.

What about enhanced redundancy pay?

Enhanced redundancy pay, meaning anything above the statutory minimum, also falls within the £30,000 exemption, provided it’s compensation for ending your employment. If statutory plus enhanced pay together exceed £30,000, only the excess is taxed.

How are redundancy payments taxed?

Not everything in a redundancy package qualifies for the £30,000 exemption. Some elements are treated as earnings, not compensation, and get taxed in full regardless of your overall payout.

1. Notice pay and PILON

Payment in lieu of notice (PILON) is always taxed as earnings. Since April 2018, this applies to every notice payment, regardless of your statutory notice pay entitlement or contract wording.

HMRC requires employers to work out what you’d have earned had you worked your notice, and tax that amount as salary, with Income Tax and National Insurance deducted as normal.

2. Holiday pay

Accrued but untaken holiday pay is always taxed as earnings. It’s money you’ve earned under your contract, so it’s taxed the same way your regular salary would be, with no link to the £30,000 tax-free exemption.

3. Bonuses, commission and unpaid wages

Any bonus, commission or wages owed at termination are taxed as earnings, in full. This applies even if paid alongside your redundancy settlement as one lump sum.

Commission or bonuses can sometimes factor into your average weekly wage when calculating statutory redundancy pay, but once identified as owed earnings, they’re taxed as earnings, not compensation.

How much redundancy tax will you pay? Worked examples

The maths is simple once you split your redundancy payment into its tax-free and taxable slices.

Here’s how four common payout amounts play out, assuming the whole sum is genuine redundancy compensation with no notice pay, holiday pay or bonus.

Redundancy pay Tax-free slice Taxable slice Rate applied Tax owed Take-home
£25,000 £25,000 £0 – £0 £25,000
£40,000 £30,000 £10,000 20% (basic rate) £2,000 £38,000
£60,000 £30,000 £30,000 40% (higher rate) £12,000 £48,000
£100,000 £30,000 £70,000 40% (higher rate) £28,000 £72,000

In every case above £30,000, no employee National Insurance applies to any part of the redundancy payment itself, only to any notice pay, holiday pay or bonus paid alongside it.

These figures assume the redundancy payment is your only source of taxable income change that year. Your actual tax depends on your salary, tax code and what else you’re paid on termination. For an estimate based on your own numbers, try our redundancy tax calculator.

Why you might pay too much tax on redundancy (and how to get it back)

Many employees pay more tax on redundancy than they should, usually for one of these reasons:

  1. Emergency tax codes. Your employer often doesn’t have your full tax history when processing a redundancy payment, especially if it’s paid after your last regular payslip. Without the right information, they may apply an emergency tax code, which can overtax the payment.
  2. Stopping work mid-tax-year. Income Tax assumes you’ll earn a similar amount all year. If you’re made redundant in, say, month six and don’t start a new job straight away, the tax already deducted from your salary and redundancy pay may be based on a full year’s earnings that never happens. This often means you’ve overpaid.
  3. Incorrect classification. If part of your payment is mistakenly taxed as earnings when it should fall within the £30,000 exemption, you’ll have paid tax you didn’t owe.

Getting it back

  1. Check your P45 and final payslip against what you were actually paid.
  2. Use your Personal Tax Account on GOV.UK to see your tax position for the year.
  3. If you’ve overpaid, claim directly from HMRC, either online or by post. You don’t need a third party to do this.
  4. If you’re unsure whether a payment was classified correctly, get that checked as part of your settlement agreement advice, before you sign, not after.

Can you reduce tax on redundancy pay over £30,000?

Yes, in one specific and effective way: asking your employer to pay the excess into your pension instead of your bank account. Here’s how it works.

  • Your employer can redirect the taxable portion of your redundancy pay, the amount above £30,000, as a pension contribution instead of cash. That portion then escapes Income Tax entirely.
  • You lose access to the money until retirement. But you keep the full amount, rather than losing 20%, 40% or 45% of it to tax.

What limits this:

  • The Annual Allowance. For 2026/27, you can receive up to £60,000 in total pension contributions tax-free in a single year. Redirecting a large redundancy payment could breach this if you’ve already made other contributions that year.
  • Carry forward. If you haven’t used your full allowance in the previous three tax years, you may be able to bring that unused amount forward, giving you more headroom for a larger redundancy sum.
  • Timing. This needs agreeing with your employer before the payment is made, not after. Once it’s paid to you as cash, the tax has already been applied.

Redundancy tax and settlement agreements

If you’re made redundant through a settlement agreement, following redundancy consultation, the tax rules above still apply. What changes is how your agreement breaks the payment down.

A typical agreement splits your payment into separate elements:

The ex gratia payment is usually the largest sum, and alongside statutory pay, it counts toward the £30,000 exemption.

Wording matters less than you’d think. HMRC looks at what each payment actually is, not what your agreement calls it. Labelling a sum “ex gratia” doesn’t make it tax-free if it’s really disguised notice pay or a bonus you were always due. Get this wrong, and the tax bill arrives after you’ve signed, not before.

This is exactly what our settlement agreement solicitors check during your same-day advice service. We review your payment structure, flag anything HMRC could reclassify, and confirm your real take-home before you sign. See our guide to settlement agreement tax.

Tax on redundancy payments – FAQs

No, you don't pay employee National Insurance on redundancy pay, at any amount. This applies even to the portion above £30,000 that is subject to Income Tax. Your employer, however, does pay employer National Insurance on anything paid above the £30,000 threshold. This asymmetry is deliberate: it's one reason redundancy pay is taxed more favourably than a salary or bonus of the same size.

Yes, if your entire package is under £30,000 and it's genuine compensation for losing your job, it's tax-free in full. That includes statutory pay plus any ex gratia top-up. Non-cash benefits count too: a company car or retained laptop gets a cash value added to your total, which can tip a package that looks under £30,000 over the line.

On £100,000, £30,000 is tax-free and £70,000 is taxable. If your basic-rate band is already used by your salary, that £70,000 is taxed at 40%, roughly £28,000, leaving around £72,000 take-home. This assumes your total income for the year doesn't exceed £125,140; if it does, part of the excess is taxed at 45% instead, and your Personal Allowance may also be reduced, so the actual bill could be higher.

Yes, a redundancy payment can affect Universal Credit, because it's assessed as capital, not income. If your savings, including the payment, exceed £16,000, you lose entitlement entirely. Between £6,000 and £16,000, your award is reduced. This applies regardless of whether the payment was tax-free, since Universal Credit rules work independently of HMRC's Income Tax treatment.

Yes, redundancy paid in installments is taxed the same way as a lump sum. HMRC aggregates all qualifying termination payments from the same employment when applying the £30,000 exemption, regardless of how many instalments they're split across. Spreading payment doesn't create extra tax-free allowance; it only affects which tax year each instalment falls into, which can matter if it spans April.

Redundancy pay is taxed the same way regardless of when you start a new job. The £30,000 exemption and marginal-rate taxation on any excess apply either way. What changes is your overall tax position for the year: starting a new job quickly means your income doesn't dip, so you're less likely to have overpaid tax that needs reclaiming from HMRC.

No, redundancy pay is not taxed the same way as your salary, up to the £30,000 threshold. Salary is earnings, taxed in full and subject to National Insurance through PAYE from the first pound. Qualifying redundancy pay is treated as compensation instead, giving you the £30,000 exemption and no employee National Insurance on any of it, even above that limit.


Get clarity on your redundancy pay today

Not sure how much of your redundancy payment will actually reach your bank account? We’ll review your package, confirm what’s tax-free and what isn’t, and get your settlement agreement signed within the hour.

  • We act exclusively for employees, not employers
  • Most settlement agreements are completed within the hour
  • Your employer pays our fees, so you pay nothing
  • Nationwide service, available today

Call us now on 020 7247 7190 or make a free enquiry online.

About the Author:

Gordon Turner

Director | GTE Settlement Agreements Gordon Turner is an employment lawyer with over 30 years of experience. Specialising in same-day settlement agreements, he is dedicated to providing employees with fast, clear, and effective legal solutions. Gordon's extensive knowledge and approachable style ensure clients feel supported every step through the process.
GTE Settlement Agreements
020 7247 7190
020 7247 7190 Enquire Now