TL;DR: A 60,000-pound UK redundancy payment is split for tax: the first 30,000 pounds of any "genuine" termination payment (the ex-gratia element) is tax-free under section 401 of the Income Tax (Earnings and Pensions) Act 2003, and the remaining 30,000 pounds is taxed as employment income at the recipient's marginal rate. National Insurance on the excess follows the post-2020 rules: employer Class 1A NIC at 13.8 percent on the amount above 30,000 pounds, but no employee NIC on the redundancy element itself. Statutory redundancy pay is always within the 30,000-pound exemption. Contractual notice pay (PILON), unpaid wages, accrued holiday pay, and bonuses are taxed in full as normal earnings outside the 30,000-pound exemption. For a basic-rate employee, total tax on the 30,000-pound excess is typically around 6,000 pounds (20 percent); for a higher-rate employee around 12,000 pounds (40 percent). A pension contribution before tax year-end is the most common way to reduce the bill.
Last reviewed May 2026
UK redundancy pay is one of the few categories of employment income that benefits from a specific income tax exemption. The first 30,000 pounds of a genuine termination payment is tax-free. Anything above that is taxed at the recipient's marginal income tax rate, and an employer NIC charge applies to the excess. The arithmetic on a 60,000-pound package is therefore reasonably straightforward once each element is correctly categorised.
This guide walks through the calculation for a 60,000-pound redundancy: what counts as the 30,000-pound exempt slice, how the taxable element is taxed, the National Insurance position, the Post-Employment Notice Pay (PENP) rules, the interaction with pension contributions and the rest of the tax year's income, and the practical steps to claim any refund through self-assessment or HMRC.
What is included in the 30,000-pound exemption
The 30,000-pound exemption in section 403 of ITEPA 2003 applies to "termination payments" - amounts paid because the employment is ending. It covers statutory redundancy pay, enhanced (contractual) redundancy pay paid genuinely as compensation for loss of office, and ex-gratia payments where there is no contractual entitlement.
It does not cover anything that is, in substance, payment for work done or earnings the employee would have received if they had stayed in employment. That excluded list includes: outstanding wages, accrued holiday pay, bonuses earned for the period worked, a contractual payment in lieu of notice (PILON), and Post-Employment Notice Pay (the deemed PILON for non-contractual cases under section 402D ITEPA). Each of those items is taxed and NIC'd in full as earnings, before the redundancy element is considered.
Where the package contains a mixture, the contractually earned elements are stripped out first and taxed as earnings, then the residual redundancy element gets the 30,000-pound exemption against it.
The breakdown on a 60,000-pound package
Take a simple case: a 60,000-pound total termination payment, with no PILON, no PENP, no accrued holiday, and no bonus. The full 60,000 pounds is treated as the redundancy element. The first 30,000 pounds is exempt. The remaining 30,000 pounds is added to the employee's other taxable income for the tax year in which it is paid.
If the employee has already earned enough in the tax year to use their personal allowance, the 30,000-pound excess slots into the basic and higher-rate bands above the year-to-date taxable income. For the 2026-27 tax year (rates as set by HMRC for England, Wales and Northern Ireland; Scottish rates are different) the basic rate band runs from the personal allowance threshold up to 50,270 pounds total taxable income, with higher rate (40 percent) above that and additional rate (45 percent) above 125,140 pounds.
A worked example: an employee earned 40,000 pounds salary up to the redundancy date. The first 30,000 pounds of redundancy is exempt. The next 10,270 pounds of the 30,000-pound excess falls in the basic rate band (taxed at 20 percent = 2,054 pounds). The remaining 19,730 pounds falls in the higher rate band (taxed at 40 percent = 7,892 pounds). Total income tax on the redundancy excess: 9,946 pounds. Net redundancy received: 60,000 - 9,946 = 50,054 pounds.
The figures above are illustrative. The actual outcome depends on year-to-date pay, the personal allowance (which tapers from 100,000 pounds onwards), Scottish residence, and the marriage allowance position.
National Insurance on the excess
Since April 2020, employer Class 1A National Insurance contributions are charged at 13.8 percent on the part of any termination payment that exceeds 30,000 pounds. The employer pays this charge, not the employee. On a 30,000-pound excess that is 4,140 pounds of employer NIC, which is part of the employer's cost rather than something deducted from the employee's payment.
Employee National Insurance is not charged on the redundancy element above 30,000 pounds. Employee NIC is charged on PILON, PENP, accrued holiday pay, bonus, and other earnings elements of the package in the normal way.
Post-Employment Notice Pay (PENP)
PENP is the deemed notice element for cases where the employer does not pay a contractual PILON but the employee is also not required to work their notice. The rule (section 402D ITEPA) calculates what the employee would have received for the unworked notice period had they been paid for it, and treats that amount as earnings (taxable and NIC'able) regardless of how the parties label it.
PENP is calculated using a statutory formula: basic pay for the pay period multiplied by the number of unworked notice days, divided by the number of days in the pay period, with adjustments for salary-sacrifice and certain bonuses. The result is the minimum that must be taxed as earnings; if the actual termination payment includes more notice-related cash, the higher figure applies.
For a 60,000-pound package where 10,000 pounds is in substance unworked notice, the PENP rule treats that 10,000 pounds as fully taxable earnings (no 30,000-pound exemption against it). The remaining 50,000 pounds is the redundancy element, of which 30,000 pounds is exempt and 20,000 pounds is taxable.
Statutory redundancy pay specifically
Statutory redundancy is set out in the Employment Rights Act 1996. The calculation is based on length of service, age, and weekly pay (capped, with the cap revised each April). The statutory amount is always within the 30,000-pound exemption: there is no scenario where statutory redundancy alone is taxable.
The maximum statutory redundancy pay is well below 30,000 pounds even for the longest-serving employee at the weekly cap. The 30,000-pound exemption issue only arises where the employer pays more than statutory: an enhanced redundancy scheme, a settlement agreement with an additional ex-gratia element, or a generous employer policy.
How the tax is collected
The employer normally operates PAYE on the taxable part of the termination payment at the point of payment. The treatment depends on whether the payment is made before or after the P45 has been issued. Before the P45, the payment goes through normal payroll under the employee's tax code; after the P45, the employer uses tax code 0T on a non-cumulative basis (Statement C in the new starter rules effectively), which often produces more tax than is ultimately due.
An overpayment under 0T can be reclaimed through self-assessment, an in-year refund request to HMRC, or a P800 reconciliation after the tax year ends. Where the only tax overpayment in the year is on a redundancy, HMRC's "claim back tax you paid through PAYE" service on GOV.UK is normally the fastest route.
Using a pension contribution to reduce the bill
A pension contribution in the same tax year reduces taxable income pound-for-pound (subject to the annual allowance and the borrower's relevant earnings). For a higher-rate employee with a 60,000-pound redundancy, paying 20,000 pounds gross into a personal pension shifts the basic-rate band threshold up by 20,000 pounds for the year and extracts the additional 20 percent higher-rate relief through self-assessment.
The annual pension allowance is 60,000 pounds (2026-27, subject to the taper for very high earners), plus up to three years of unused allowance carried forward. Many redundancy recipients have substantial unused allowance available because their previous contributions were well below the annual cap. A pension contribution funded out of the redundancy lump sum is therefore one of the most common ways to reduce the tax on the taxable slice.
An employer-arranged "redundancy sacrifice" - where the employee asks the employer to pay part of the termination payment directly into the pension instead of as cash - can preserve more of the 30,000-pound exemption against the cash element. The mechanism is technical and the settlement agreement wording matters, so legal review at the time of the settlement is usually worthwhile.
How we verified this
The 30,000-pound termination payment exemption reflects sections 401 to 416 of the Income Tax (Earnings and Pensions) Act 2003. The Post-Employment Notice Pay rules reflect section 402D ITEPA as inserted by Finance (No.2) Act 2017. The employer Class 1A NIC charge on the excess over 30,000 pounds reflects the Social Security Contributions (Amendment of Schedule 1) Order 2019 and the rate set for the current tax year by HMRC. Statutory redundancy pay reflects the Employment Rights Act 1996. The PAYE treatment of post-P45 payments and the 0T tax code reflect current HMRC PAYE manual guidance. Pension annual allowance figures reflect current HMRC guidance for the 2026-27 tax year. Specific worked example figures use the personal allowance and band thresholds in force at the time of writing and should be reconfirmed against current GOV.UK guidance.
Disclaimer: This article is general information about the UK taxation of redundancy pay. It is not personal tax advice. The right outcome in an individual case depends on the make-up of the termination payment, year-to-date earnings, Scottish or rest-of-UK residence, and the pension annual allowance position. Anyone with a complex package, a large redundancy, or a settlement agreement on the table should take advice from a tax adviser or accountant before signing.
Frequently asked questions
How much tax will I pay on a 60,000-pound redundancy payment?
The first 30,000 pounds is tax-free under section 403 ITEPA. The remaining 30,000 pounds is taxed at the marginal income tax rate. For a basic-rate taxpayer the tax on the excess is around 6,000 pounds (20 percent). For a higher-rate taxpayer with at least 30,000 pounds of higher-rate band left, the tax is 12,000 pounds (40 percent). The exact figure depends on year-to-date pay and the personal allowance.
Do I pay National Insurance on redundancy pay?
The employee pays no NIC on the redundancy element above the 30,000-pound exemption. The employer pays Class 1A NIC at 13.8 percent on the excess (this is the employer's cost, not deducted from the employee). PILON, holiday pay, bonus and other earnings within the package are NIC'd in the normal way.
Is statutory redundancy pay taxable?
Statutory redundancy pay is always within the 30,000-pound exemption and is therefore tax-free. The 30,000-pound issue only arises where the employer is paying enhanced redundancy or a separate ex-gratia amount on top of the statutory minimum.
How can I reduce the tax on a redundancy payment?
Paying part of the taxable element into a personal pension (or asking the employer to pay it direct into a pension as a redundancy sacrifice) reduces the taxable amount pound-for-pound, subject to the annual pension allowance and unused allowance carried forward from the previous three tax years. Timing the redundancy and any pension contribution within the same tax year is what matters.
How do I claim back overpaid tax on a redundancy payment?
If the employer operated 0T tax code on the payment (typical after the P45 has been issued), too much tax may have been deducted. The overpayment can be reclaimed through HMRC's "claim back tax you paid through PAYE" service on GOV.UK, through self-assessment if you file a return, or automatically through a P800 reconciliation after the tax year ends.
