Losing your job is stressful enough without trying to work out how much of your redundancy payment you actually get to keep. The good news is that a significant portion of most redundancy packages is completely tax-free. The bad news is that the rules for what qualifies and what does not are more nuanced than many people realise.
The £30,000 Tax-Free Exemption
The first £30,000 of a genuine redundancy payment is exempt from income tax. This applies whether you receive statutory redundancy pay, an enhanced (contractual) redundancy payment from your employer, or a combination of both. The exemption covers the total redundancy element — not £30,000 of statutory plus another £30,000 of enhanced.
Any amount above £30,000 is added to your taxable income for the year and taxed at your marginal rate.
What Counts Toward the £30,000 — and What Does Not
Not every payment you receive when leaving a job qualifies for the exemption. Understanding the distinction is critical:
| Payment Type | Tax Treatment |
|---|---|
| Statutory redundancy pay | Tax-free (within £30,000) |
| Enhanced/contractual redundancy | Tax-free (within £30,000) |
| Ex-gratia payment for loss of employment | Tax-free (within £30,000) |
| Pay in lieu of notice (PILON) | Always taxable as earnings |
| Accrued holiday pay | Always taxable as earnings |
| Outstanding wages or commission | Always taxable as earnings |
| Restrictive covenant payments | Always taxable as earnings |
Since April 2018, all PILON payments are taxable regardless of whether your contract includes a PILON clause. HMRC calculates the taxable element based on your basic pay multiplied by the notice period, even if your employer calls the entire sum a “redundancy payment.”
Statutory Redundancy Pay (2025-26)
Statutory redundancy pay is calculated using your age, years of continuous service (capped at 20 years), and weekly pay (capped at £643 per week in 2025-26).
The formula is:
- Under 22: 0.5 week’s pay per year of service
- 22 to 40: 1 week’s pay per year of service
- 41 and over: 1.5 weeks’ pay per year of service
| Years of Service | Under 22 | Age 22-40 | Age 41+ |
|---|---|---|---|
| 5 years | £1,607.50 | £3,215 | £4,822.50 |
| 10 years | £3,215 | £6,430 | £9,645 |
| 15 years | £4,822.50 | £9,645 | £14,467.50 |
| 20 years (max) | £6,430 | £12,860 | £19,290 |
These figures assume weekly pay at or above the £643 cap. If your weekly pay is below £643, use your actual weekly pay instead.
Worked Example
Sarah, age 45, has worked for her employer for 10 years. Her annual salary is £50,000 (£961.54/week, but capped at £643 for statutory purposes). She receives the following on redundancy:
| Component | Amount |
|---|---|
| Statutory redundancy pay (10 years × 1.5 weeks × £643) | £9,645 |
| Enhanced redundancy (employer top-up) | £25,355 |
| Total redundancy payment | £35,000 |
| Pay in lieu of notice (3 months) | £12,500 |
| Accrued holiday pay (12 days) | £2,307.69 |
Tax calculation:
-
Redundancy payment (£35,000): The first £30,000 is tax-free. The remaining £5,000 is taxable.
-
PILON (£12,500): Fully taxable as earnings, subject to both income tax and employee NI.
-
Holiday pay (£2,307.69): Fully taxable as earnings, subject to both income tax and NI.
-
Sarah’s taxable income for the year:
- Salary earned before redundancy (assume 9 months): £37,500
- Taxable redundancy excess: £5,000
- PILON: £12,500
- Holiday pay: £2,307.69
- Total taxable income: £57,307.69
-
Tax on the taxable redundancy excess (£5,000): This falls above £50,270, so it is taxed at 40% = £2,000.
-
Tax on PILON and holiday pay: Also taxed at marginal rates through PAYE. At a mix of basic and higher rate, Sarah pays approximately £4,773 in income tax on these elements, plus NI.
Sarah keeps £30,000 of her redundancy completely tax-free. The taxable portion costs her around £2,000 in additional income tax, with no employee NI on that £5,000 excess.
National Insurance on Redundancy Pay
The NI treatment differs from income tax:
-
Employee NI: Redundancy pay — even the amount above £30,000 — is not subject to employee Class 1 NI. Only payments that are taxable as earnings (PILON, holiday pay, wages) attract employee NI.
-
Employer NI: Since April 2020, the amount of redundancy pay above £30,000 is subject to employer Class 1A NI at 15%. Using Sarah’s example, her employer pays 15% on the £5,000 excess = £750 in employer NI.
This means the £30,000 exemption is more valuable than it first appears — you save both income tax and employee NI on qualifying redundancy payments, unlike regular earnings where both apply.
What If Your Redundancy Pay Exceeds £30,000
If you receive a substantial package — for example, £60,000 in total redundancy pay — the first £30,000 is tax-free, and the remaining £30,000 is taxed at your marginal rate. If this pushes your income into the £100,000-£125,140 band, you may also lose part of your Personal Allowance, creating an effective 60% marginal rate on some of the excess.
In this situation, consider:
- Pension contributions: You can ask your employer to pay some of the excess directly into your pension. Employer pension contributions from redundancy payments are not subject to the £30,000 limit for income tax — they are exempt as employer contributions (within the Annual Allowance).
- Timing: If you are made redundant near the end of the tax year, a small delay in payment could split the taxable element across two tax years, keeping you in a lower bracket.
Key Takeaways
- The first £30,000 of genuine redundancy pay is tax-free — this includes both statutory and enhanced payments combined.
- PILON is always taxable as earnings, regardless of what your employer calls it.
- Holiday pay, outstanding wages, and commission are always taxable.
- Redundancy pay above £30,000 is taxable as income but not subject to employee NI.
- Employers pay 15% Class 1A NI on redundancy pay exceeding £30,000.
- Consider pension contributions to shelter excess redundancy pay from tax.
Use our redundancy pay calculator to estimate your statutory entitlement and the tax on your total package.