This guide is maintained as a current resource for September 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.
How much tax will you pay on your redundancy package? Understand the £30,000 tax exemption, which payments are taxable, and how to calculate your net redundancy amount.
Redundancy pay in England and Wales is a form of compensation for loss of employment when a role is no longer required. The way redundancy pay and related termination payments are treated for tax and National Insurance contributions (NICs) is often misunderstood. This article provides a clear, step‑by‑step explanation of how redundancy pay is taxed, what parts of a redundancy package may attract tax or NICs, and how the UK tax system treats different elements of redundancy payments. It also explains practical considerations for employees and employers, including how tax is deducted and when employees might need to contact HM Revenue and Customs (HMRC). All guidance is anchored in authoritative UK sources.
What Redundancy Pay Is and Why Tax Treatment Matters
Redundancy pay is money received when an employee's position ends due to redundancy. The Government sets legal minimum redundancy payments based on age, length of service and weekly pay, but many employers also provide enhanced or discretionary redundancy payments as part of a wider severance package. Tax treatment matters because it affects how much of the payment an employee actually receives - after income tax and NICs are applied where relevant. The rules determine which parts of a redundancy package are tax‑free and which are taxable.
The £30,000 Tax‑Free Threshold
Tax‑Free Redundancy Payments
Under UK tax law, up to £30,000 of a termination or redundancy payment is exempt from income tax and NICs where it qualifies as a genuine redundancy payment connected to the end of employment. This £30,000 threshold applies to the total of qualifying redundancy and termination payments received from a single employer.
Qualifying payments that count towards this threshold typically include:
- Statutory redundancy pay – the minimum amount an employee is entitled to by law.
- Enhanced redundancy pay or ex‑gratia payments provided by the employer specifically to compensate for the loss of employment.
- Certain cash equivalents of non‑cash benefits included in the redundancy package (for example, the value of company property retained) may also count towards the £30,000 limit.
If the total of all such qualifying termination payments is £30,000 or less, the entire amount is usually free from income tax and NICs.
Excess Over £30,000
Any part of a redundancy payment that exceeds the £30,000 exemption is treated as taxable income and subject to income tax under normal PAYE rules. This excess amount does not benefit from the £30,000 exemption, but it is generally not subject to employee NICs.
For example, if an employee receives a total redundancy payment of £40,000, the first £30,000 is generally tax‑free and the remaining £10,000 is taxed as earnings.
What Is and Is Not Taxed
Understanding which elements of a redundancy package are taxable is crucial. Not all amounts paid upon termination count as qualifying redundancy pay for tax purposes.
Taxable Elements
The following are typically treated as taxable earnings under UK PAYE rules:
- Unpaid wages, bonuses, overtime and commission accrued before termination. These are taxed as normal earnings.
- Holiday pay for unused leave – this is treated like wages and is subject to income tax and NICs.
- Payment in lieu of notice (PILON) or similar arrangements that compensate an employee instead of working their notice period are generally treated as taxable earnings unless specific contractual conditions apply.
- Any part of redundancy or termination payments above the £30,000 exemption is taxable.
Tax‑Free Elements
The following are normally not subject to income tax or NICs when they qualify under the rules:
- The first £30,000 of a qualifying redundancy or termination payment (statutory or enhanced) received in one job.
- Certain limited termination payments made for reasons such as personal injury or disability that are not part of standard redundancy.
- Employer pension contributions paid to a registered pension scheme as part of a redundancy package, within statutory limits.
How Tax Is Deducted
Tax and NICs on redundancy and termination payments are usually deducted through PAYE, and when payments are made can affect how tax is calculated:
- If a payment is made before the employment has ended and before an employer issues a P45, the payment will normally be taxed using the employee's standard PAYE code.
- If a payment is made after employment has ended, the employer may use a temporary 0T tax code (no personal allowance) on a Week 1/Month 1 basis for the taxable elements. This can result in overpayment of tax which may need to be reclaimed from HMRC.
Employees should check their final payslip and P45 to ensure that the correct tax treatment has been applied. If too much tax has been deducted, they can claim a refund from HMRC, often after the end of the tax year.
Practical Examples
Example 1: Simple Redundancy Within £30,000
An employee receives £25,000 of total redundancy pay from an employer and no other termination payments. All of this falls within the £30,000 tax‑free threshold, so no income tax or NICs are due on this payment.
Example 2: Redundancy Payment Exceeding £30,000
An employee's redundancy package totals £45,000, including statutory and enhanced redundancy pay. The first £30,000 is tax‑free. The remaining £15,000 is treated as taxable income and taxed under PAYE.
Example 3: Mixed Payments
An employee receives £22,000 statutory redundancy pay, £8,000 payment in lieu of notice (PILON), and £3,000 for unused holiday pay. The total is £33,000. While £30,000 of the redundancy pay qualifies for the exemption, the £8,000 PILON and £3,000 holiday pay are treated as taxable earnings. In practice, the exemption applies first to the redundancy element, leaving the PILON and holiday pay taxed as earnings under PAYE.
Claiming Tax Back or Paying Additional Tax
Because taxable elements of termination payments are often paid once the employee has left the payroll, the tax code used (such as 0T Week 1/Month 1) may result in too much tax being withheld. Basic‑rate taxpayers may overpay under this code, while higher‑rate taxpayers may underpay. Employees can contact HMRC to reconcile their tax position and claim a refund or make additional payments as necessary.
Key Takeaways
Redundancy pay in England and Wales is treated differently for tax purposes depending on the nature of the payment and its total value:
- Up to £30,000 of qualifying redundancy and termination payments (including statutory and enhanced redundancy pay) is usually tax‑free and not subject to NICs.
- Payments above £30,000 are subject to income tax but generally not employee NICs.
- Elements such as holiday pay, unpaid wages, bonuses and PILON are treated as taxable earnings and taxed under PAYE.
- Tax on payments made after termination may use a 0T tax code, and employees should check with HMRC if too much or too little tax has been deducted.
Understanding tax treatment of redundancy pay helps employees and employers plan redundancy packages and avoid unexpected tax liabilities.
