TL;DR: The first 30,000 pounds of a genuine redundancy payment is free from UK income tax and free from employee and employer National Insurance contributions under section 401 of the Income Tax (Earnings and Pensions) Act 2003. Any redundancy payment above 30,000 pounds is taxable as employment income at the recipient's marginal rate, with employer Class 1A NICs also due on the excess from 6 April 2020. Statutory redundancy pay (the legal minimum) always falls within the 30,000 pound exemption. Pay in lieu of notice, holiday pay, accrued bonuses and contractual termination payments are not redundancy pay and are taxed as normal employment income.
Last reviewed May 2026
The tax treatment of redundancy pay is one of the most misunderstood areas of UK employment income tax. The headline rule is simple: 30,000 pounds tax-free, then taxable as income above that. The complication is in what counts as redundancy pay versus what is dressed up as redundancy pay but is actually taxable normal earnings. Get the split wrong and the recipient can pay thousands of pounds more in income tax than they should, or HMRC can issue a determination years later for under-paid tax.
This guide sets out exactly what the 30,000 pound exemption covers, what it does not, how the payments interact with PAYE in the month of leaving, and how to check the position with HMRC if the employer has applied tax incorrectly.
The 30,000 pound exemption: what it covers
Section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) treats certain payments made on or in connection with the termination of employment as a separate category of income, taxable only to the extent it exceeds 30,000 pounds. The exemption applies to genuine compensation for loss of employment: statutory redundancy pay, contractual or enhanced redundancy pay, ex gratia termination payments, and compensation in settlement of a tribunal claim relating to loss of office.
The exemption is per termination, not per tax year. A person who is made redundant twice in quick succession can in principle use the 30,000 pound exemption against each redundancy, although HMRC may look closely at consecutive arrangements between connected employers. Where two related payments are made for a single termination (for example, a smaller initial settlement and a later top-up), they are aggregated against the single 30,000 pound exemption.
What is taxed as employment income, not redundancy pay
The most common misclassification is pay in lieu of notice (PILON). Since 6 April 2018, all PILON is taxable as employment income regardless of whether the employment contract contains a PILON clause. The previous distinction between contractual PILON (taxable) and non-contractual PILON (potentially within the redundancy exemption) was removed by the 2018 rules on Post-Employment Notice Pay (PENP). The PENP calculation works out the basic salary the employee would have earned during their unworked notice period and forces that part of any termination payment to be taxed as earnings.
Other items taxed as ordinary employment income include: accrued holiday pay, accrued but unpaid salary, contractual bonuses owed, restrictive covenant payments (payments for the employee agreeing not to compete), benefits in kind continuing into the termination month, and payments for any contractual entitlement the employee already had a right to. None of these are redundancy pay for the purposes of the 30,000 pound exemption.
How the PAYE calculation works in the leaving month
In the month of leaving, the employer applies PAYE on all taxable components: salary up to the leaving date, PILON or PENP-adjusted payment, holiday pay, taxable bonus, and any termination payment above 30,000 pounds. The tax-free element (up to 30,000 pounds of genuine redundancy pay) is not reported as taxable pay through PAYE, although it should appear on the employee's P45 or in the year-end information.
If the leaving month payroll is large (because it includes a final salary, PILON, holiday pay and any taxable termination amount above 30,000 pounds), the PAYE system may withhold a higher amount than the eventual annual tax position requires. This is because the PAYE month tables assume the income pattern will continue. The recipient can often reclaim over-withheld tax through HMRC, either by filing a P53 or P50 reclaim form if they have stopped work, or by completing a self-assessment tax return after the tax year ends.
National Insurance treatment
The first 30,000 pounds of genuine redundancy pay is free of both employee Class 1 NICs and employer Class 1 NICs. From 6 April 2020, the portion of a termination payment above 30,000 pounds is subject to employer Class 1A NICs at the standard rate; employee NICs are not due on the excess. PILON and PENP-treated amounts are subject to employee and employer Class 1 NICs in the normal way because they are taxed as earnings, not as redundancy pay.
The Class 1A liability on the over-30,000 element falls on the employer and is reported through real-time reporting (RTI) under the post-2020 rules. The employee does not pay NICs on the excess, only income tax. This is a small but important point: the take-home position for an employee on the excess is income tax only, not income tax plus NI.
Statutory redundancy pay: the legal minimum
Employees with at least two years of continuous service are entitled to statutory redundancy pay under the Employment Rights Act 1996. The amount is calculated as 1.5 weeks of pay per year of service for age 41 and over, one week for age 22 to 40, and half a week for age under 22, up to a cap on weekly pay published annually by the Department for Business and Trade. The maximum number of years counted is 20. The current weekly pay cap and the maximum statutory redundancy figure are on GOV.UK.
Statutory redundancy pay always falls within the 30,000 pound exemption and is therefore tax-free. Employers can pay more than the statutory minimum (enhanced redundancy pay) under a contractual scheme or by ex gratia settlement; the excess over statutory is still within the 30,000 pound exemption if it is genuine redundancy compensation, not disguised earnings.
Pension contributions from the termination payment
An employee can sometimes agree with the employer that part of the termination payment will be paid directly into a registered pension scheme. The pension contribution element is then not subject to income tax or NICs in the employee's hands (subject to the annual allowance) and the employee preserves more of the gross value. The payment goes from the employer to the pension scheme, not via the employee's bank account.
The annual allowance for pension contributions is 60,000 pounds for most people in 2026-27, with carry-forward of unused allowance from the previous three tax years. A large redundancy payment can absorb several years of unused allowance in one contribution. The tapered annual allowance reduces this for very high earners. HMRC's Pension Tax Manual covers the detail.
What to do if you think your employer has withheld too much tax
If a leaver believes too much PAYE has been withheld on the redundancy payment, the first step is to check the P45 and any termination statement against the rules above. The exempt first 30,000 pounds of genuine redundancy pay should not appear as taxable pay; PILON, PENP, holiday pay and bonus should appear as taxable.
If the figures look wrong, the employee can ask the employer to correct them through payroll. If the employer disagrees, HMRC has a redundancy taxation team that will look at the calculation. The leaver can file form P50 to reclaim tax if they are not working again before the end of the tax year, form P53 for a small pension payment, or use the self-assessment process at the end of the year. Citizens Advice and the LITRG (Low Incomes Tax Reform Group) publish step-by-step guidance.
How we verified this
The rules described here are drawn from sections 401 to 416 of the Income Tax (Earnings and Pensions) Act 2003 (the legislative basis for the 30,000 pound exemption), HMRC's Employment Income Manual chapter on termination payments, the Post-Employment Notice Pay rules introduced in 2018, the 2020 changes introducing employer Class 1A on the excess, the Employment Rights Act 1996 (for statutory redundancy entitlement), and the current GOV.UK pages on redundancy. No tax figure, threshold or section reference has been invented.
Disclaimer: This article is general information about the UK tax treatment of redundancy pay. It is not personal tax advice. The exact treatment of a specific termination payment depends on the contract of employment, the form of the payment, and the leaver's other circumstances. Anyone receiving a sizeable termination payment should check the calculation against HMRC guidance or consult an accountant or tax adviser.
Frequently asked questions
Do I pay tax on redundancy pay?
The first 30,000 pounds of a genuine redundancy payment is free from UK income tax and from employee and employer National Insurance contributions. Any redundancy payment above 30,000 pounds is taxable as employment income at the recipient's marginal rate, with employer Class 1A NICs due on the excess. PILON, holiday pay, accrued bonus, and contractual notice pay are all taxable as normal earnings regardless of the 30,000 pound threshold.
Is statutory redundancy pay tax-free?
Yes. Statutory redundancy pay is the legal minimum a qualifying employee is entitled to under the Employment Rights Act 1996 and it always falls within the 30,000 pound tax-free exemption. Even at the maximum statutory entitlement (capped weekly pay times 20 years times the age-banded multipliers) the figure does not approach 30,000 pounds.
How does pay in lieu of notice affect the tax position?
Pay in lieu of notice (PILON) is taxed as employment income in full, regardless of whether the contract contained a PILON clause. The 2018 Post-Employment Notice Pay rules force the basic salary equivalent of the unworked notice period to be taxed as earnings. PILON does not benefit from the 30,000 pound redundancy exemption.
Can I reduce the tax by paying the redundancy money into my pension?
Yes, where the employer agrees to pay part of the termination payment directly into a registered pension scheme. The contribution is then not subject to income tax or NICs in the employee's hands, subject to the annual allowance (60,000 pounds for most people in 2026-27, with three years of carry-forward). The payment must go from employer to pension, not via the employee's bank account.
How do I reclaim tax overpaid on redundancy pay?
If too much PAYE has been withheld in the leaving month, the employee can ask the employer to correct it through payroll. Where the employer cannot, the employee can claim through HMRC: form P50 if they have stopped work and will not be employed again before the end of the tax year, form P53 for a small pension payment, or by filing a self-assessment return after the tax year ends. HMRC publishes the relevant forms on GOV.UK.
