Is redundancy pay taxable?

Is redundancy pay taxable?

Statutory redundancy pay is always tax-free. More broadly, the first £30,000 of a genuine termination payment, which includes statutory and enhanced redundancy pay and ex-gratia compensation for loss of office, is free of income tax and employee National Insurance under sections 401 to 403 of ITEPA 2003. Anything above £30,000 is taxed as income at your marginal rate. Other elements of a settlement, such as outstanding salary, holiday pay, bonuses and payment in lieu of notice, are taxed separately as normal earnings and do not benefit from the exemption.

Is redundancy pay tax free?

Statutory redundancy pay is always tax-free, however much you have worked. Enhanced redundancy pay and other genuine termination compensation are also tax-free, but only up to £30,000 in total; anything above that, and any part that is really disguised earnings such as PILON, is taxed as normal income.

Do you pay tax on redundancy pay?

Not on statutory redundancy pay, and not on the first £30,000 of a wider termination payment. You do pay income tax, at your marginal rate, on any genuine termination compensation above £30,000, and in full on anything that is really salary, PILON, holiday pay or a bonus rather than redundancy compensation.

What is the £30,000 tax-free threshold?

It is the amount of a genuine termination payment you can receive free of income tax and employee National Insurance, set by sections 401 to 403 of ITEPA 2003. It applies once per employment (or group of associated employers), not per payment and not per tax year, so splitting a payment across two tax years does not double the allowance.

The threshold covers genuine compensation for the loss of your job: statutory redundancy pay, enhanced redundancy pay above the statutory minimum, and ex-gratia sums paid to settle a dismissal or discrimination claim. It does not cover payments that are really disguised earnings, such as PILON, outstanding wages, accrued holiday or contractual bonuses, which are taxed in full regardless of how the settlement agreement labels them. If you have received a tax-free termination payment from the same or an associated employer before, it reduces the allowance still available to you now (HMRC's Employment Income Manual, EIM13000 onwards).

How much tax will I pay on a £60,000 redundancy?

If the full £60,000 is genuine redundancy or ex-gratia compensation, the first £30,000 is tax-free and the remaining £30,000 is added to your income for the year and taxed at your marginal rate, 20%, 40% or 45% depending on your total income. Outstanding salary, holiday pay, bonuses and PILON are taxed separately as normal earnings on top of this.

In practice a settlement rarely arrives as one clean £60,000 redundancy payment. It is usually a mix of elements, some tax-free and some fully taxable, as in the worked example below.

This example assumes the whole £60,000 is genuine redundancy or ex-gratia compensation. If part of your settlement is actually PILON, outstanding salary, holiday pay or a bonus, that part is taxed in full as earnings and sits outside the £30,000 exemption altogether, which lowers the tax-free proportion of the total. See our settlement agreement tax guide for how a mixed package is typically broken down.

How much tax will I pay at different redundancy payment amounts?

The table below shows the tax-free and taxable split for five common payment amounts, assuming the whole sum is genuine redundancy or ex-gratia compensation with no PILON or other notice-pay element. PENP (payment in lieu of notice calculated under the s.402D formula) is always taxable in full and sits outside this split; see the PILON section above for how it is calculated separately.

PENP is taxable in full and is not shown here: add any PENP figure to the taxable element above. Use our redundancy tax calculator to work out the split for your own payment, including any PENP element.

Do you pay National Insurance on redundancy pay?

No employee National Insurance is due on the part of a genuine termination payment up to £30,000, and none is due on amounts above £30,000 either. Employers do pay Class 1A National Insurance on the amount above £30,000, but that cost falls on the employer, not on your payment.

This is one respect in which a genuine redundancy or ex-gratia payment is treated more favourably than normal earnings: even the taxable slice above £30,000 escapes employee NIC, it just does not escape income tax. Employer Class 1A NIC on the excess has applied since April 2020 and is paid directly by the employer through payroll, so it does not reduce the amount you receive.

Is payment in lieu of notice (PILON) taxable?

Yes, in full. Since April 2018, all PILON is taxed as earnings under the Post-Employment Notice Pay (PENP) rules in section 402D ITEPA 2003(the PENP formula sits in ss.402A to 402E), regardless of whether your contract has a PILON clause. It does not count towards the £30,000 tax-free threshold.

Before April 2018, a payment in lieu of notice could sometimes be paid tax-free if the contract had no PILON clause. That distinction no longer applies. The PENP formula now calculates a notional notice-pay figure that is taxed as earnings in every case, and only any genuine termination compensation on top of that figure can benefit from the £30,000 exemption. Outstanding salary, accrued holiday pay and bonuses are taxed the same way, as normal earnings through PAYE. See our PENP formula worked example for how the notional notice-pay figure is actually calculated, and our payment in lieu of notice guide for how PILON interacts with the rest of a redundancy package. If you were kept on full pay and benefits during your notice instead of being paid it off in one sum, see our garden leave guide instead, since garden leave pay is taxed as normal salary, not as a termination payment.

Worked examples: redundancy pay tax at different package levels

The tax treatment changes depending on what a package is made of and how large it is. These four illustrative examples show statutory-only redundancy, a package that crosses the £30,000 threshold, PILON on top of redundancy pay, and a pension sacrifice used to reduce tax on the excess. Figures are rounded for clarity; your own numbers will differ.

These examples assume every non-pension, non-PILON element is genuine redundancy or ex-gratia compensation. Outstanding salary, accrued holiday and bonuses are always taxed in full as earnings, on top of any of the scenarios above, and sit outside the £30,000 exemption entirely.

Can paying redundancy pay into my pension reduce the tax I owe?

Yes. If your employer agrees to pay some or all of the taxable part of your termination payment as an employer pension contribution direct into a registered pension scheme, rather than to you personally, that amount is normally paid gross, with no income tax or National Insurance deducted, subject to your available annual allowance and normal pension rules.

This only works for an employer contribution paid directly into the scheme as part of the settlement, not for money paid to you which you then pay in yourself; a personal contribution from your own bank account gets tax relief through the pension wrapper in the usual way, but it does not turn an otherwise taxable settlement payment tax-free. Ask your solicitor to check the settlement agreement wording routes the payment correctly, and check with your pension provider that the contribution fits within your annual allowance before agreeing to it (HMRC's Employment Income Manual, EIM13000 onwards).

What if I am made redundant twice in the same tax year?

The £30,000 exemption applies once per employment, or per group of associated employers, not once per tax year. A second genuine termination payment from a different, unconnected employer in the same tax year gets its own fresh allowance; a second payment from the same or an associated employer does not.

"Associated employer" has a specific meaning: broadly, two employers under common control, such as two companies in the same group. If you were made redundant from one group company and later re-employed and made redundant again by another company in the same group, HMRC treats any earlier tax-free termination payment as reducing the allowance still available on the second one. Unconnected employers, for example two entirely separate businesses you worked for in the same tax year, each carry their own full £30,000 allowance (HMRC's Employment Income Manual, EIM13000 onwards).

Redundancy pay tax: frequently asked questions