Is redundancy pay taxable?
How the £30,000 tax-free threshold works, what tax applies above it, and whether National Insurance and PILON are taxed.
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 undersection 401 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.
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 section 401 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 EIM13000).
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.
| Component | Amount | Tax treatment |
|---|---|---|
| Statutory + enhanced redundancy pay | £30,000 | Tax-free (within the £30,000 threshold) |
| Ex-gratia compensation (above threshold) | £30,000 | Taxable at your marginal rate |
| Total redundancy package | £60,000 | £30,000 tax-free, £30,000 taxable |
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.
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 402B ITEPA 2003, 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.
Not sure how your own package splits up?
We review the settlement agreement same-day if you submit before 2pm, and check the tax-free and taxable elements are allocated correctly. Free to you when your employer pays our fee, which is the case in nearly every UK settlement agreement.
Get a same-day review →Redundancy pay tax: frequently asked questions
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, is free of income tax and employee National Insurance under section 401 ITEPA 2003. Anything above £30,000 is taxed as income at your marginal rate.
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 section 401 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.
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.
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.
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 402B ITEPA 2003, regardless of whether your contract has a PILON clause. It does not count towards the £30,000 tax-free threshold.
Disclaimer
This guide provides general information only and is not legal or tax advice. Tax rules are complex and depend on the specific facts of your case. For advice on your own circumstances, speak to a qualified adviser.
Related guides
Get your redundancy offer reviewed free
Before you sign, let an SRA-regulated solicitor check your redundancy offer is fair and that the tax-free and taxable elements are correctly structured. Free to you, your employer pays our fees.
Get your free review