Last reviewed: May 2026
Key facts:- Statutory and ex-gratia redundancy payments are tax-free up to a combined limit of 30,000 pounds.
- Payment in lieu of notice (PILON) is fully taxable, including under the post-employment notice pay (PENP) rules introduced in April 2018.
- Holiday pay, bonuses earned and contractual sick pay are taxable in the normal way, regardless of how the redundancy is labelled.
UK Employment Rights Hub › Is Redundancy Pay Taxed
Redundancy pay is one of the most common sources of confusion in personal tax. The 30,000 pound tax-free element covers genuine compensation for the loss of office, but it does not extend to notice pay, holiday pay or other contractual entitlements. This upgraded guide sets out exactly which parts of a redundancy settlement are taxable and which are not, with worked examples and references to the relevant HMRC and statutory rules.
The 30,000 Pound Tax-Free Limit
Up to 30,000 pounds of a redundancy payment can be paid tax-free under section 401 of the Income Tax (Earnings and Pensions) Act 2003. The exemption applies to the compensation element only - that is, the payment for the loss of the job, not for work done.
Statutory redundancy pay (calculated on the gov.uk redundancy calculator) is always within the exemption. Ex-gratia payments and enhanced redundancy package elements also fall within the exemption up to the 30,000 pound limit.
Where the total of statutory and ex-gratia exceeds 30,000 pounds, the excess is taxable as employment income through PAYE. National Insurance contributions are not normally due on the genuine compensation element, even on the part above 30,000 pounds, although this rule has changed over time and current HMRC guidance should be checked.
Notice Pay - PILON and PENP
Payment in lieu of notice (PILON) is fully taxable and subject to National Insurance. It does not benefit from the 30,000 pound exemption. This is true whether the employer pays PILON as a separate line on the final payslip or as part of a settlement agreement.
From April 2018, the post-employment notice pay (PENP) rules require employers to identify the notional notice pay element in any termination payment, regardless of how it is labelled. PENP is taxable as earnings. The rules stop employers and employees structuring agreements to disguise notice pay as tax-free compensation.
The PENP calculation uses a formula based on basic pay multiplied by the unworked notice period. HMRC publishes a calculator and worked examples on gov.uk. The PENP amount is taxable through PAYE in the final payroll period.
Holiday Pay and Final Pay Elements
Holiday pay accrued but not taken at the date of leaving is taxable as normal employment income. It is subject to PAYE tax and NI. This is true whether the holiday is taken before leaving (with pay covering the holiday period) or paid out as part of the final salary.
Bonuses earned during the employment but paid after leaving are taxable as employment income. They are not part of the tax-free compensation element. Final-year performance bonuses, retention bonuses and contractual commissions all follow this rule.
Contractual sick pay, salary for work done in the final notice period, and any contractual pension contributions made by the employer all sit outside the 30,000 pound exemption. They are taxed in the normal way.
Worked Example - Putting it Together
Example: an employee with five years service is made redundant. The final settlement comprises statutory redundancy of 4,000 pounds, an ex-gratia top-up of 18,000 pounds, three months PILON of 7,500 pounds, holiday pay of 1,500 pounds, and a final salary of 2,500 pounds. Total cash 33,500 pounds.
The statutory redundancy plus ex-gratia is 22,000 pounds, fully covered by the 30,000 pound exemption. No tax due on this portion. The PILON of 7,500 pounds is fully taxable as earnings. Holiday pay of 1,500 pounds is fully taxable. Final salary of 2,500 pounds is fully taxable.
Total taxable income on the settlement is 11,500 pounds (PILON 7,500 plus holiday 1,500 plus salary 2,500). This is added to other earnings in the tax year for income tax purposes. PAYE is deducted through the final payroll. NI is due on the PILON, holiday and salary portions.
Self Assessment and Year-End Reconciliation
Most redundancy payments are processed through PAYE so no additional Self Assessment return is needed. The P45 issued at the end of employment shows the payments and tax already deducted.
Where the redundancy is paid in the same tax year as a new job, the new employer P45 may not pick up the full tax position. Some employees end up paying too little tax during the year and owe a balancing payment when HMRC reconciles the records.
Higher earners and those with multiple income sources should consider whether Self Assessment is needed. Anyone receiving more than 50,000 pounds of tax-free compensation, or with other complex tax circumstances, should take specialist advice. HMRC personal tax account shows the current year tax position.
Tax-Efficient Structuring of Redundancy Payments
Pension contributions instead of cash. The employer can pay redundancy money directly into the employee pension as an employer contribution. Such contributions are exempt from income tax and NI up to the annual allowance. This can be highly tax-efficient for higher-rate taxpayers.
Spreading payments across tax years. Where a redundancy package is paid partly in March and partly in April of the following tax year, the taxable element of each payment is taxed using the personal allowance for that year. This can reduce the overall tax bill compared to a single payment.
Claiming back overpaid PAYE. The PAYE calculation on redundancy can be overestimated, particularly where the personal allowance is used up in the final month of employment. A P50 form or Self Assessment can reclaim the overpaid tax once HMRC has the full year picture.
Avoiding the timing trap. Workers who start a new job in the same tax year as the redundancy should be careful with PAYE. The new employer P45 may not pick up the full tax position; balancing payments may be due at year end. Some employees end up underpaying tax in-year and owing money to HMRC.
Where to Get Free Independent Help
Acas (the Advisory, Conciliation and Arbitration Service) is the statutory body that provides free guidance to workers and employers on workplace issues including is redundancy pay taxable. The Acas helpline is the first port of call for many employment law questions. Acas also runs early conciliation before Employment Tribunal claims.
Citizens Advice and law centres provide free initial advice on is redundancy pay taxable. Some law centres have specialist employment law advisers and can represent claimants at Employment Tribunal hearings free of charge. The Law Centres Network website at lawcentres.org.uk lists centres by location.
Trade unions provide free legal advice and representation to members on is redundancy pay taxable. Even where the worker is not currently a union member, joining a union before issues arise gives access to professional advice if problems develop later. The TUC website at tuc.org.uk identifies relevant unions.
The Employment Tribunal handles workplace disputes that cannot be resolved through Acas. The tribunal is a no-cost jurisdiction (no fees to issue claims at the time of writing) and is designed to be accessible to litigants in person. The gov.uk employment tribunal pages explain the process.
For specific protected groups, dedicated organisations provide tailored support. The Equality Advisory Support Service helps with discrimination claims under the Equality Act 2010. Maternity Action specialises in pregnancy and maternity rights at work. Working Families is a charity supporting families with workplace flexibility issues.
Where the issue involves workplace health and safety, the Health and Safety Executive (HSE) is the enforcement body. HSE accepts reports from workers concerned about unsafe practices and can investigate. Reports are confidential to the extent practicable. The HSE website at hse.gov.uk explains how to raise a concern.
Putting It All Together
The rules above set out the legal framework, the practical steps and the support routes available. Where the situation is straightforward, the gov.uk pages and the official tools should be enough to act on. Where the situation is more complex, the free advice services listed in the previous section can usually clarify the position and identify the right next step. Many issues that look intractable at first turn out to be resolvable once the right service is engaged.
Keeping written records of communications and decisions throughout is good practice. Where a decision needs to be challenged later - through an internal complaint, an ombudsman, a tribunal or a court - the quality of the contemporaneous record often decides the outcome. Dates, names, reference numbers and copies of correspondence are the building blocks of any later dispute. The gov.uk advice pages and the relevant ombudsman or tribunal websites all set out the evidence they consider when reviewing decisions, and gathering that evidence from the start is one of the most effective protections available.
Frequently Asked Questions
Is statutory redundancy pay taxed?
No. Statutory redundancy pay calculated on the gov.uk redundancy calculator is tax-free as it falls within the 30,000 pound exemption under section 401 ITEPA 2003.
What is PENP?
Post-employment notice pay. From April 2018, the notional notice pay element of a termination settlement is taxable as earnings regardless of how it is labelled in the agreement.
Do I pay NI on redundancy?
Not on the genuine compensation element. NI is due on PILON, holiday pay, salary and bonuses. The 30,000 pound exempt portion does not attract NI.
How much tax will I pay on a 50,000 pound redundancy?
30,000 pounds is tax-free. The remaining 20,000 pounds is added to other earnings and taxed as employment income at the appropriate marginal rate (20, 40 or 45 per cent depending on total income).
Can the employer pay redundancy into my pension?
Yes. Pension contributions made directly by the employer to a registered pension scheme are not part of the 30,000 pound calculation and are tax-effective. The annual allowance and lifetime allowance rules still apply.
Where can I check my final payslip?
The P45 and final payslip show the breakdown of pay elements. The personal tax account on gov.uk shows the running tax position for the year. Discrepancies should be queried with payroll or HMRC.
Is the 30,000 pound exemption shared between employers?
Yes. The 30,000 pound is a single exemption across all redundancies in connection with the same employment or related employments. Multiple redundancies from associated employers share the same exemption.
Does redundancy pay affect Universal Credit?
Yes. Redundancy compensation counts as capital for UC purposes once received. Capital above 16,000 pounds disqualifies the household from UC. Capital between 6,000 and 16,000 reduces the UC award.
How long does PENP last?
PENP is the notional notice pay element of the package. It applies regardless of how the agreement is structured. The calculation is based on the unworked notice period as set out in the contract or the statutory notice period if longer.
Can I take my redundancy as a pension contribution?
Yes. Employer pension contributions made directly to a registered scheme are not subject to the 30,000 pound calculation and are tax-effective. The annual allowance and lifetime allowance rules still apply.
How We Verified This
Information is taken from the Income Tax (Earnings and Pensions) Act 2003 sections 401 to 416 on legislation.gov.uk, the HMRC Employment Income Manual on gov.uk, the Finance (No 2) Act 2017 provisions introducing PENP, and the gov.uk redundancy and tax pages.
