Is redundancy pay taxed? What is tax-free and what is not

Is redundancy pay taxed? The £30,000 rule

Redundancy pay is tax-free up to £30,000 in the UK, and anything above £30,000 is taxed as income at your normal rate. The limit covers statutory redundancy pay plus any enhanced or ex-gratia payment for losing your job, added together. According to HMRC's Employment Income Manual (EIM13505), section 403 of the Income Tax (Earnings and Pensions) Act 2003 taxes these payments "only to the extent that they exceed £30,000".

The £30,000 does not cover everything in your final pay. Notice pay, holiday pay, unpaid wages and bonuses are earnings, taxed in full with National Insurance, even when your employer pays them at the same time as the redundancy money. GOV.UK lists all of these as parts of a termination payment and says what you pay tax on "depends on what's included".

Start by working out your statutory entitlement with the redundancy pay calculator, then check how your employer has split the rest of the package.

Which parts of a redundancy package are tax-free

Only payments made because your job has ended, such as statutory and enhanced redundancy pay, get the £30,000 tax-free allowance; payments you had earned or were entitled to under your contract do not. The table sets out how HMRC treats each common part of a package from 6 April 2026.

The £30,000 is one allowance per job loss, not per payment. HMRC's manual (EIM13530) says all termination payments from the same employer, or from associated employers, are added together before the £30,000 is applied. The legal fees exception (EIM13740) needs the payment to go straight to your solicitor under a specific term of the settlement agreement.

Payment in lieu of notice is taxed in full, even if it is not in your contract

Payment in lieu of notice (PILON) is taxed as earnings with no £30,000 allowance, whether or not your contract mentions it. Since 6 April 2018 employers must work out post-employment notice pay (PENP), which is the basic pay you would have earned if you had worked your full notice period, and tax that amount in full. According to HMRC's manual (EIM13876), PENP "does not benefit from the £30,000 threshold".

The rule stops employers relabelling notice pay as compensation. If you are owed 3 months' notice at £4,000 a month and your employer pays you off the next day with a single £40,000 "redundancy payment", roughly £12,000 of it is PENP and is taxed as pay (the exact figure comes from a formula based on days). Only the rest counts towards the £30,000 allowance.

Garden leave is different. If you are given proper notice but told to stay at home, you are still employed and are paid your normal salary with normal tax, according to EIM12975. Your statutory notice is at least 1 week for each full year of service, up to 12 weeks, according to GOV.UK, and your contract can give you more.

Holiday pay, bonuses and arrears are taxed as normal pay

Holiday pay for leave you did not take, final salary, arrears, bonuses and commission are all earnings, so they get Income Tax and National Insurance like any other payslip. HMRC's manual (EIM12850) says a payment you receive under the terms of your contract, or one your employer usually makes and you could expect, is taxable in full. Statutory and contractual redundancy payments are the exception, because redundancy pay is always taxed under the termination rules instead.

A bonus you had already earned for the year stays taxable in full even if the settlement agreement calls it compensation. If the letter lumps everything into one figure, ask your employer for a breakdown, because the split decides your tax.

National Insurance on redundancy pay

You pay no National Insurance on redundancy pay of any size, but your employer pays 15% Class 1A National Insurance on the part above £30,000. HMRC's National Insurance Manual (NIM13201) says the 2019 Act keeps "an unlimited employee NICs exemption on termination awards" and puts an employer-only charge on amounts over £30,000 from 6 April 2020. GOV.UK's rates and thresholds for employers give the Class 1A rate for 2026/27 as 15%.

Notice pay, holiday pay and bonuses are different: they carry normal Class 1 National Insurance at 8% on monthly pay between £1,048 and £4,189, and 2% above that, for 2026/27. A big final payslip therefore pays mostly at 2% on the part above £4,189.

Statutory redundancy pay from 6 April 2026: £751 a week, up to £22,530

Statutory redundancy pay is capped at £751 a week and £22,530 in total for redundancies on or after 6 April 2026 in England, Scotland and Wales. According to GOV.UK, you qualify after 2 years with your employer and get half a week's pay for each full year under age 22, 1 week's pay for each full year aged 22 to 40, and 1.5 weeks' pay for each full year aged 41 or over, counting up to 20 years. In Northern Ireland the cap is £783 a week and £23,490 in total, according to nidirect's current figures.

Because the statutory maximum is £22,530, statutory pay on its own never uses up the £30,000 tax-free allowance. It still counts towards it: HMRC's manual (EIM13760) says all termination payments must be added together before the £30,000 is applied. You have 6 months from the date your job ends to claim statutory redundancy pay, according to GOV.UK.

Example: a 45-year-old on £48,000 a year (£923.08 a week) with 12 full years' service, made redundant on 30 September 2026, gets 14 weeks at the capped £751, or £10,514, from the site's statutory redundancy pay calculator. The weeks are 4 years at 1.5 weeks (aged 41 to 44) and 8 years at 1 week.

Worked example: tax on a £45,000 redundancy package

On a £45,000 package of £8,000 notice pay, £2,000 holiday pay and a £35,000 redundancy payment, £30,000 is tax-free and £15,000 is taxable. The example uses the same 45-year-old on £48,000 a year in England, leaving on 30 September 2026 with no other income for the rest of 2026/27. The £35,000 redundancy payment includes the £10,514 statutory amount.

The Income Tax figures come from the site's take-home engine for 2026/27. Six months' salary of £24,000 plus the £15,000 taxable part is £39,000 of income, with tax of £5,286. Without the package the tax on £24,000 is £2,286, so the package adds £3,000, all at the 20% basic rate. The notice and holiday pay go through the September payslip, where the employee pays £447.50 of National Insurance instead of the usual £236.16, which is £211.34 more.

The package is worth about £41,789 after tax and National Insurance: £45,000 minus £3,000 tax minus £211.34 National Insurance. If you start a new job before 6 April 2027, your total income for the year rises and part of the £15,000 could be taxed at 40%.

Why more tax is taken than you owe

Payroll takes far more than £3,000 at first. With tax code 1257L, the September payslip of £14,000 is taxed against only 6 months of allowance and basic rate band, so it deducts about £4,363.50 instead of the usual £590.50. The £5,000 paid after the P45, on code 0T month 1, loses another £1,371.67, because £3,141.67 is taxed at 20% and £1,858.33 at 40%. The total deducted for the year is about £8,687.67 against a bill of £5,286, so about £3,401.67 comes back. The next sections explain the tax code and how to reclaim it.

Which tax code applies to redundancy pay paid after your P45

A payment made after your employer has issued your P45 is taxed on code 0T on a week 1 or month 1 basis, which gives no Personal Allowance. According to GOV.UK's guidance for employers on an employee leaving, this applies to anyone paid after leaving, "including someone you're giving a taxable redundancy payment over £30,000". Scottish taxpayers get S0T and Welsh taxpayers C0T.

The same guidance tells employers to deduct National Insurance on payments after leaving "unless it's a redundancy payment", and to treat irregular payments like accrued holiday pay as a weekly payment for National Insurance. Payments made before the P45, in your last normal payslip, use your usual tax code on a cumulative basis.

Code 0T is the correct code for a payment after your P45, not a mistake by your employer, but like an emergency tax code it often takes too much. The tax code hub explains what each code means if yours looks wrong.

How to get overpaid tax back after redundancy

Overpaid tax on redundancy pay comes back through your next employer, through form P50, or after the tax year ends. The right route depends on what you do next:

• You start a new job within 4 weeks. Give the new employer your P45. According to GOV.UK, your new employer will make any repayment due through your salary. Your P45 does not show a payment made after it was issued, so tax taken on that payment may not come back until HMRC checks the year after 5 April.
• You have been out of work for 4 weeks or more and claim no taxable benefits. Claim on form P50, online or by post, once you have received your final pay. HMRC says it may take 14 days to reply.
• You claim a taxable benefit or get a works pension from the old employer. Do not use the P50. A works pension provider can make the repayment, or HMRC repays any overpaid tax after 5 April.

GOV.UK's "Check how to claim a tax refund" tool has a route for a redundancy payment and tells you which form applies. Keep the settlement letter and final payslips, because HMRC may ask how each amount was taxed.

Paying redundancy money into a pension to avoid tax

Redundancy money your employer pays straight into your pension is free of Income Tax and National Insurance and does not use any of your £30,000 allowance. HMRC's manual (EIM13735) says such contributions to a registered pension scheme are not charged, and that "payments that qualify under these rules should not be treated as using up any of the £30,000 threshold". Arrangements are usually made so that you give up the cash before the contribution is paid, so ask before the payment is processed.

In the worked example, asking the employer to pay the £5,000 above £30,000 into your pension instead of in cash saves you £1,000 of tax, puts the full £5,000 in your pot and saves the employer £750 of Class 1A. At the 40% rate the saving would be £2,000.

You can also pay in yourself, but the tax-free £30,000 does not count as earnings for pension tax relief. HMRC's Pensions Tax Manual (PTM044100) says only the part of a redundancy payment above £30,000 is relevant UK earnings. Your notice pay, holiday pay and salary for the year do count. All contributions, from you and your employer, must fit within the £60,000 annual allowance for 2026/27.

For how relief at source, net pay and higher rate claims work on your own contributions, see how pension tax relief works.

What to do before you sign the settlement

The tax on a redundancy package is decided by how it is split, so check the split before you sign a settlement agreement.

1. Ask for a written breakdown of the package into notice pay, holiday pay, statutory redundancy pay, any enhanced or ex-gratia payment, and any pension contribution.
2. Check the statutory figure with the redundancy pay calculator and your notice pay against your contract. If you do not have your contract or pay records, get them with a subject access request for your HR file.
3. If the taxable part is large, ask whether some of it can be paid into your pension before it is processed.
4. Work out your take-home pay for the rest of the year with the UK salary take-home calculator, and plan to reclaim any overpaid tax with your next employer, a P50 or after 5 April 2027.