This guide is maintained as a current resource for July 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Clear guide to how much redundancy pay is tax free in England and Wales. Learn how the £30,000 tax‑free threshold works, what payments count towards it, which elements are taxable, treatment of non‑cash benefits, and practical examples to help employees and employers understand redundancy payment taxation.
When someone is made redundant in England and Wales, they may be entitled to a redundancy payment. Understanding how much of that payment is tax free is important because it affects the amount the employee actually receives. Tax treatment depends on the makeup of the redundancy package, the types of payments involved and current UK tax rules. This article explains the key principles of redundancy pay tax treatment, what counts towards the tax‑free amount, how employer payments are classified for tax, and common practical questions that arise when redundancy pay is received.
Tax‑Free Redundancy Pay Threshold
Under current UK tax rules, up to £30,000 of a redundancy or termination payment can be tax free. This exemption applies to qualifying redundancy payments, which include statutory redundancy pay and additional voluntary (enhanced) redundancy payments intended to compensate for loss of employment. If the total of all qualifying payments in a redundancy package does not exceed this £30,000 threshold, that portion is normally exempt from income tax and employee National Insurance contributions (NICs). If the total exceeds £30,000, the amount above this limit is typically subject to income tax.
Statutory redundancy pay by itself is unlikely to exceed £30,000 under normal entitlement limits, but any additional employer payments that qualify as compensation for loss of employment must be included when applying the £30,000 cap.
What Counts Towards the £30,000
Statutory Redundancy Pay
This is the minimum amount an employee is legally entitled to receive if dismissed by reason of redundancy with at least two years' continuous service. Statutory redundancy pay is tax free up to £30,000.
Voluntary or Enhanced Redundancy Pay
Employers may offer enhanced redundancy payments above the statutory minimum as part of a settlement or redundancy package. Provided these are genuinely compensatory for losing employment, they also count towards the £30,000 tax‑free threshold.
Non‑Cash Benefits
If non‑cash benefits (for example a company car or laptop retained after redundancy) form part of your redundancy package, their cash equivalent value is added to the total of qualifying redundancy payments for tax purposes. If this combined total exceeds £30,000, the excess may be taxable.
Payments Not Covered by the £30,000 Tax‑Free Limit
Not all elements of a redundancy package are treated as qualifying redundancy pay. The following are usually taxable even if the overall redundancy payment is below £30,000:
Payment in Lieu of Notice (PILON)
A PILON is a payment made instead of allowing an employee to work their notice. Under current tax rules, all PILON amounts are treated as taxable earnings and do not benefit from the £30,000 exemption. Employers must treat them as earnings subject to income tax, and usually NICs, under PAYE.
Unused Holiday Pay, Bonuses and Wages Owing
Amounts like accrued but untaken holiday pay, unpaid wages, bonuses or overtime are treated as normal earnings. These elements are subject to income tax and NICs in the usual way and do not count towards the redundancy payment threshold.
How the £30,000 Exemption Works in Practice
To determine how much redundancy pay is tax free, the employer and HM Revenue & Customs (HMRC) consider the total termination payment package:
- Add together all qualifying redundancy pay: statutory redundancy and any enhanced redundancy payment.
- Include non‑cash benefits' cash values for tax calculation.
- Exclude taxable earnings like PILON, holiday pay, wages, bonuses - these are taxed separately.
- The first £30,000 of the qualifying redundancy total is usually tax free; amounts above it are subject to income tax (but not employee NICs).
Example
If an employee receives £25,000 statutory redundancy pay and an enhanced £10,000 redundancy payment, the total qualifying amount is £35,000. The first £30,000 is tax free; the remaining £5,000 is taxable as part of a termination payment.
Employer National Insurance Contributions
While employees do not generally pay employee NICs on redundancy payments, employers are required to pay Class 1A NICs on any part of a termination payment that counts as employment income and exceeds £30,000. This includes the excess amount above the tax‑free threshold.
Practical Considerations and Common Questions
Does the £30,000 Apply If There Is No Contractual Redundancy Right?
Yes. The £30,000 exemption applies to qualifying redundancy payments regardless of whether the statutory entitlement exists - for example, if an enhanced redundancy payment is agreed in a settlement for someone without statutory rights. The key is that the payment is genuinely compensation for loss of employment, not just regular contractual pay.
What If You Receive Redundancy After Leaving the Payroll?
If redundancy or termination payments are made after employment has already ended, employers usually apply tax through PAYE using an appropriate tax code. Overpayment or underpayment of tax can occur, and employees may need to reconcile this with HMRC.
Could the Value of Non‑Cash Benefits Reduce the Tax‑Free Amount?
Yes. If you are given non‑cash benefits as part of your redundancy - for instance a company‑owned device or vehicle - these are assessed at their cash equivalent value and added to the total. This could push the qualifying redundancy pay above £30,000, making some of it taxable.
Does Redundancy Pay Affect Tax Bands?
Only the taxable portion of redundancy pay (above £30,000, or components treated as earnings like PILON or unused holiday) counts as taxable income for the year and may affect the tax band you fall into. The tax‑free £30,000 exemption does not count as taxable income.
Key Takeaways
- Up to £30,000 of redundancy or termination pay that is genuinely compensation for loss of employment is usually tax free.
- This £30,000 limit includes statutory redundancy pay and any enhanced severance intended to compensate for redundancy.
- Payments such as PILON, holiday pay, wages and bonuses are not included in the £30,000 exemption and are normally taxable under PAYE.
- Non‑cash benefits included in a redundancy package are valued for tax purposes and can reduce the tax‑free benefit.
- Employers pay NICs on amounts above £30,000 that count as taxable termination pay; employees may need to engage with HMRC if tax deduction errors occur.
Understanding how much redundancy pay is tax free helps employees and employers plan redundancy packages and avoid unexpected tax liabilities.
