TL;DR: Yes, but only above 30,000 pounds. UK redundancy pay is taxable as employment income to the extent the genuine redundancy element exceeds 30,000 pounds. The first 30,000 pounds is free of income tax and free of both employee and employer National Insurance contributions under section 401 of the Income Tax (Earnings and Pensions) Act 2003. Pay in lieu of notice (PILON), holiday pay, accrued salary, contractual bonuses and restrictive covenant payments are all taxed in full as normal earnings regardless of the 30,000 pound exemption, because they are not redundancy compensation. Statutory redundancy pay always falls within the exemption and is therefore tax-free.
Last reviewed May 2026
"Do you get taxed on redundancy pay" is a question with a deceptively simple headline answer (some of it, yes) and a long list of practical complications underneath. The 30,000 pound exemption for genuine termination payments is well established in UK tax law, but the bigger source of confusion is what counts as redundancy pay for the purposes of the exemption and what does not. A leaver who looks at the gross figure on a final payslip and applies "30,000 pounds tax-free" to the entire amount often gets a nasty surprise from PAYE.
This guide answers the question component by component, explains how the tax-free 30,000 pounds is calculated, and shows the practical effect on a leaver's net position. It is written from the leaver's perspective, with worked examples to clarify the mechanics.
The headline rule: 30,000 pounds tax-free
Section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) treats payments made on or in connection with the termination of employment as a separate income category, taxable only to the extent the genuine termination element exceeds 30,000 pounds. The exemption applies to: statutory redundancy pay, contractual or enhanced redundancy pay (where the employer has a redundancy scheme paying more than the legal minimum), ex gratia compensation, and compensation in settlement of certain tribunal claims relating to loss of office.
The exemption applies to each genuine termination, not each tax year. A person made redundant twice in quick succession can use the exemption against each redundancy, although HMRC can look closely at consecutive arrangements between connected employers. The figure has been 30,000 pounds since the rule was introduced and is not index-linked, which means real-terms erosion every year.
What is NOT covered by the 30,000 pound exemption
The trap most leavers fall into is assuming the entire termination payment is "redundancy". It is not. The following components are fully taxed as ordinary employment income regardless of the 30,000 pound exemption: final salary up to the leaving date, accrued and unused holiday pay, contractual bonus owed, pay during garden leave, and any pay in lieu of notice.
The 2018 Post-Employment Notice Pay (PENP) rules mean that even non-contractual PILON is now taxed as earnings. The PENP calculation works out the basic salary equivalent of the unworked notice period and forces that amount to be taxed as employment income. Only the excess of the termination payment above PENP can sit within the 30,000 pound redundancy exemption. The mechanism stops disguised PILON from sheltering behind the exemption.
National Insurance: where redundancy stands out
The first 30,000 pounds of genuine redundancy pay is also exempt from both employee and employer National Insurance contributions. This is what makes the exemption financially powerful: a 30,000 pound salary would attract NIC plus income tax, whereas a 30,000 pound redundancy element attracts neither.
From 6 April 2020, the portion of any termination payment above 30,000 pounds is subject to employer Class 1A NICs at the standard employer NI rate. Employee NICs are not due on the excess; only employer NICs. The Class 1A is reported through PAYE rather than the P11D. From the leaver's perspective, the change has no direct effect: the leaver still pays income tax on the excess and no NICs on any of it.
Worked example: a 50,000 pound package
Consider a leaver with five years of service made redundant with a package described as 50,000 pounds. The package consists of: 4,500 pounds final salary and accrued holiday, 8,000 pounds PILON (three months' notice on a 32,000 pound salary), and 37,500 pounds described as redundancy compensation. After applying the PENP rule, the 8,000 pounds PILON is taxed as earnings. The 4,500 pounds final salary and holiday is taxed as earnings. The remaining 37,500 pounds is the redundancy element; the first 30,000 pounds is tax-free, and 7,500 pounds is taxed as income.
The tax position depends on the leaver's marginal rate. A basic-rate taxpayer pays 20 percent on the 7,500 pounds excess plus the 12,500 pounds of taxable salary and PILON (a combined 20,000 pounds extra taxable income in that month) at the bands that apply when this is added to year-to-date earnings. Because the PAYE month tables annualise the leaving month payment, the in-year deduction is often higher than the eventual annual tax position, and HMRC refunds the excess.
What if the redundancy payment is below 30,000 pounds?
If the genuine redundancy element is below 30,000 pounds, the entire redundancy element is tax-free and NI-free. The PILON, holiday pay, and salary components are still taxed and NI-charged as normal earnings; only the redundancy compensation itself benefits from the exemption.
For most people with under five years of service, statutory redundancy pay alone is well below 30,000 pounds. The full exemption is most likely to come into play for longer-service employees, senior staff with enhanced redundancy schemes, or settlement agreements where the employer has paid additional compensation to settle a potential tribunal claim. The exemption is the same regardless of which of these is the source of the redundancy payment.
Settlement agreements and discrimination claims
A settlement agreement (formerly called a compromise agreement) is the legal document used when an employee waives their right to bring tribunal claims in exchange for a payment. The tax treatment of the payment depends on what the payment is for. Compensation for loss of office is within section 401 ITEPA and the 30,000 pound exemption. Discrimination compensation, if it is for non-economic loss such as injury to feelings, can in some cases be fully outside section 401 and tax-free (case law has clarified the boundaries).
The settlement agreement should ideally split the consideration into named heads (loss of office, injury to feelings, restrictive covenant, legal fees) so the employer's payroll team can apply the correct treatment. Restrictive covenant payments are taxed as earnings under section 225 ITEPA regardless of context. Legal fees paid by the employer to the leaver's solicitor for advice on the settlement are usually not taxed as the leaver's income under ESC A81.
Paying redundancy money into a pension to reduce tax
Where the redundancy excess (the part above 30,000 pounds) is significant, paying it into a pension can be highly tax-efficient. The contribution has to go directly from the employer to a registered pension scheme; the employer pays a contribution that would otherwise have been taxable income, and neither the employee nor the employer pays tax or NI on the pension contribution element (subject to the annual allowance).
The annual allowance is 60,000 pounds for most people in 2026-27, with three years of carry-forward of unused allowance. A leaver with 50,000 pounds of unused allowance carried forward from previous years can sometimes shelter a six-figure excess in a single contribution. The tapered annual allowance reduces this for very high earners; an FCA-authorised pension adviser can model the actual allowance available.
Claiming back overpaid tax
The PAYE deduction in the leaving month is often higher than the eventual annual tax position because the month tables annualise the leaving payment. If the leaver does not start another job before the end of the tax year, much of the excess deduction can be reclaimed in-year. The relevant HMRC forms are P50 (for leavers who have stopped work and will not be employed again before the end of the tax year), P53 (for small pension lump sums), and P53Z (for flexible pension drawdown lump sums where employment has ceased).
For leavers who return to work within the same tax year, the PAYE position usually self-corrects through the next employer's payroll once the new P45 is processed. Where it does not, the leaver can apply for an in-year refund or wait for the year-end reconciliation. Self-assessment is required where the leaver has other income that triggers it (over 100,000 pounds total income, dividends above the threshold, untaxed savings income above the savings allowance).
How we verified this
The framework set out here is based on sections 401 to 416 and section 225 of the Income Tax (Earnings and Pensions) Act 2003, the Employment Rights Act 1996 (for statutory redundancy entitlement), the Finance Act 2018 (introduction of PENP), the Finance Act 2019 (employer Class 1A on the excess from 2020), HMRC's Employment Income Manual chapter on termination payments, and the current GOV.UK pages on redundancy pay. The 30,000 pound exemption has been the figure since the rule was first set and is not indexed. No tax figure or section reference has been invented.
Disclaimer: This article is general information about UK tax on redundancy pay. It is not personal tax advice. The precise treatment of a specific termination payment depends on the contract of employment, the structure of the payment, and the leaver's other income. Anyone receiving a significant termination payment should check the calculation against HMRC's guidance or consult an accountant or tax adviser.
Frequently asked questions
Is the first 30,000 pounds of redundancy pay always tax-free?
Yes, where the payment is genuinely compensation for loss of office and not disguised salary, holiday pay, PILON or bonus. The 30,000 pound exemption applies to the genuine redundancy element. Other components of a termination package are taxed in full as employment income.
Is PILON taxable?
Yes. Since 6 April 2018, all PILON is taxable as employment income regardless of contract wording, under the Post-Employment Notice Pay rules. The PENP calculation works out the basic salary equivalent of the unworked notice period and forces that amount to be taxed as earnings before the 30,000 pound exemption is applied to whatever is left.
Will my redundancy push me into a higher tax bracket?
It can, if the taxable portion takes the leaver's total income for the year above the higher-rate threshold or the additional-rate threshold. The first 30,000 pounds of genuine redundancy pay is outside the tax bands; PILON, holiday pay, salary, and any excess above 30,000 pounds is taxable income that counts towards the bands. A pension contribution from the termination payment can reduce the headline tax bill significantly.
Is statutory redundancy pay taxable?
Statutory redundancy pay is the legal minimum under the Employment Rights Act 1996 and always falls within the 30,000 pound exemption. Even at the maximum statutory entitlement, the figure is comfortably below 30,000 pounds, so statutory redundancy pay is always tax-free in practice.
Can I get back tax that was deducted from my redundancy pay?
If too much PAYE was deducted in the leaving month, the leaver can usually reclaim it through HMRC. The relevant forms are P50 (stopped working before end of tax year), P53 (small pension), or P53Z (flexible drawdown). Where the leaver returns to work in the same tax year, the new employer's PAYE normally self-corrects. The year-end reconciliation catches any remaining over-deduction.
