Yes, you may pay tax on redundancy in the UK, but the first £30,000 of qualifying redundancy and termination compensation is usually tax-free.
If your qualifying redundancy compensation is more than £30,000, the excess is normally subject to Income Tax. However, the tax rate is not automatically 20%, 40% or 45%.
The taxable amount is added to your other taxable income for the tax year, which can push some of the payment into a higher tax band.
Other parts of a redundancy package, including PILON, Post-Employment Notice Pay (PENP), unpaid wages, holiday pay, bonuses and commission, are normally treated as earnings and can be taxable even when your redundancy compensation is below £30,000.
For 2026/27, statutory redundancy pay is calculated using a maximum weekly wage of £751, with a maximum statutory redundancy payment of £22,530.
How Much Redundancy Pay Is Tax-Free?
The first £30,000 of qualifying termination payments and benefits combined can normally be received without Income Tax.
This can include:
- Statutory redundancy pay
- Enhanced redundancy compensation
- Genuine ex-gratia termination payments
- Some non-cash benefits received because employment has ended
The £30,000 threshold applies to the qualifying termination package as a whole. It does not give you a separate £30,000 exemption for statutory redundancy pay, enhanced redundancy pay and other severance payments.
Under HMRC’s rules for termination payments, qualifying statutory and additional severance payments can fall within the combined £30,000 tax-free threshold, while ordinary earnings remain taxable.
What Counts Towards The £30,000 Limit?
Suppose you receive:
- £18,000 statutory redundancy pay
- £17,000 enhanced redundancy compensation
The combined qualifying payment is £35,000.
The first £30,000 would normally be tax-free and the remaining £5,000 would be taxable.
This does not necessarily mean the £5,000 is all taxed at your existing marginal rate. Your total taxable income across the entire tax year determines which Income Tax bands apply.
What Parts Of A Redundancy Package Are Taxable?
A redundancy package can contain several payments with completely different tax treatments.
| Payment | Income Tax | Employee NI | £30,000 Exemption? |
|---|---|---|---|
| Statutory redundancy pay | Usually tax-free within combined limit | Usually No | Yes |
| Enhanced redundancy compensation | Taxable above combined £30,000 limit | Usually No on genuine termination award | Yes |
| PILON | Yes | Yes | No |
| PENP | Yes | Yes | No |
| Outstanding salary | Yes | Yes | No |
| Holiday pay | Yes | Yes | No |
| Bonus or commission | Yes | Yes | No |
| Gardening leave salary | Yes | Yes | No |
| Restrictive covenant payment | Yes | Normally Yes | No |
| Qualifying non-cash termination benefit | Potentially | Depends on treatment | Can Count Towards Limit |
The most important distinction is why the money is being paid. Compensation for losing your employment can receive different tax treatment from money you would have earned if you had continued working.
PILON And Notice Pay
Payment in lieu of notice, usually called PILON, is money paid when your employment ends without you working all or part of your notice period.
PILON is treated as employment income rather than tax-free redundancy compensation. Income Tax and National Insurance can therefore apply.
For example, if you receive:
- £25,000 redundancy compensation
- £4,000 PILON
The £25,000 could fall within the tax-free redundancy allowance, while the £4,000 PILON would normally be taxable as earnings.
What Is Post-Employment Notice Pay?
Post-Employment Notice Pay, or PENP, prevents employers and employees from treating what is effectively notice pay as tax-free redundancy compensation.
This means that simply calling a payment an “enhanced redundancy payment” does not automatically bring all of it within the £30,000 exemption.
If part of the payment effectively replaces earnings you would have received during your notice period, your employer may have to calculate a PENP amount. That part is normally subject to Income Tax and National Insurance.
Statutory redundancy pay itself is not subject to the PENP calculation.
Holiday Pay, Bonuses And Unpaid Wages
Amounts you have already earned through employment do not become tax-free simply because they are paid when you leave.
Normal Income Tax and National Insurance rules generally apply to:
- Outstanding wages
- Accrued holiday pay
- Overtime
- Commission
- Bonuses
- Notice pay
These should normally appear separately from genuine redundancy compensation on your final payment breakdown.
Do You Pay National Insurance On Redundancy Pay?
You do not normally pay employee National Insurance contributions on genuine qualifying redundancy compensation, including the taxable portion above £30,000.
However, this does not mean National Insurance never applies to a redundancy package.
Your employer normally pays Class 1A National Insurance on the qualifying termination award above £30,000.
Ordinary employment earnings are different.
Employee and employer National Insurance can still apply to amounts such as:
- PILON
- PENP
- Holiday pay
- Unpaid wages
- Bonuses
- Commission
This distinction is important because a payment can be subject to Income Tax without necessarily being subject to employee National Insurance.
How Much Tax Will You Pay On Redundancy Over £30,000?
There is no separate “redundancy tax rate”.
The taxable part of your redundancy package is added to other taxable income received during the tax year.
Someone who has been a basic-rate taxpayer for most of the year could therefore find that a taxable redundancy payment pushes part of their annual income into a higher band.
For more detail on how the Personal Allowance and tax bands work together, see UK income tax thresholds and allowances.
2026/27 Income Tax Rates
For England, Wales and Northern Ireland, the standard Personal Allowance for 2026/27 is £12,570.
| ncome Band With Standard Allowance | Rate |
|---|---|
| Up To £12,570 | 0% |
| £12,571 To £50,270 | 20% |
| £50,271 To £125,140 | 40% |
| Over £125,140 | 45% |
The Personal Allowance starts reducing when adjusted net income exceeds £100,000 and can be completely removed at £125,140.
Can Redundancy Pay Push You Into A Higher Tax Band?
Yes.
Only the taxable parts of the redundancy package affect your taxable income.
For example, suppose you have already received £45,000 of taxable salary during the tax year and then receive:
- £50,000 genuine redundancy compensation
- £5,000 PILON
Of the £50,000 redundancy compensation, £30,000 may be tax-free and £20,000 may be taxable.
The £5,000 PILON is also taxable.
You therefore have another £25,000 of taxable income to consider. This can cause part of your income to fall within the higher-rate tax band.
Receiving a large redundancy package does not mean the whole payment suddenly becomes taxable at 40%. Income Tax remains progressive, so different portions of taxable income can fall into different bands.
Scotland Compared With The Rest Of The UK
Scottish taxpayers have separate Income Tax bands for employment income.
For 2026/27, the Scottish rates include:
| Income With Standard Personal Allowance | Rate |
|---|---|
| £12,571 To £16,537 | 19% |
| £16,538 To £29,526 | 20% |
| £29,527 To £43,662 | 21% |
| £43,663 To £75,000 | 42% |
| £75,001 To £125,140 | 45% |
| Over £125,140 | 48% |
This means two employees receiving the same taxable redundancy amount could ultimately have different tax liabilities depending on whether they are Scottish taxpayers.
Redundancy Tax Examples
The examples below show why it is important to separate genuine redundancy compensation from ordinary earnings.
| Scenario | Redundancy Compensation | Other Payment | Basic Tax Treatment |
|---|---|---|---|
| A | £20,000 | £4,000 PILON | £20,000 redundancy tax-free, £4,000 PILON taxable |
| B | £40,000 | None | £30,000 tax-free, £10,000 taxable |
| C | £35,000 | £5,000 holiday pay | £5,000 redundancy excess plus £5,000 holiday pay taxable |
| D | £50,000 | £8,000 PILON | £20,000 redundancy excess plus £8,000 PILON taxable |
Your actual tax bill will depend on your wider income, tax code, Personal Allowance, pension contributions and other circumstances.
Why Has My Employer Used An 0T Tax Code?
A surprisingly high deduction from a redundancy or termination payment does not always mean your final tax bill will be that high.
The timing of the payment matters.
Payment Before Your P45
If the termination payment is processed before your employer issues your P45, the employer can normally process taxable amounts through PAYE using the tax information available at that point.
Payment After Your P45
If your former employer makes a taxable payment after issuing your P45, they will normally use an 0T tax code on a week 1 or month 1 basis.
Scottish taxpayers may see S0T, while Welsh taxpayers may see C0T.
An 0T code means no Personal Allowance is applied to that particular PAYE calculation. The payment is taxed using the applicable tax bands without taking account of unused Personal Allowance from earlier or later in the year.
This can result in more tax being deducted initially than you ultimately owe.
How To Claim Back Overpaid Redundancy Tax?
PAYE deducted from a redundancy payment is not always your final tax liability.
Overpayments are more likely where:
- Your redundancy payment was taxed using 0T
- You lost your job early in the tax year
- You remain unemployed for part of the year
- Your annual income ends up lower than payroll assumptions suggested
- You had unused Personal Allowance
- Your employer processed a large taxable payment after your P45
If you start another job, your new employer may be able to correct some overpaid tax through PAYE once HMRC has the necessary information.
If you stop working and do not immediately start another job, you may be able to claim a refund during the tax year using form P50, provided you meet HMRC’s eligibility conditions.
P50 is not appropriate for everyone. For example, different procedures can apply if you receive certain taxable benefits, start another job shortly afterwards or receive an occupational pension.
Keep your:
- P45
- Final payslip
- Redundancy calculation
- Settlement agreement, where applicable
- Details of taxable and tax-free elements
- HMRC correspondence
These documents make it much easier to check whether the PAYE deduction was correct.
Can You Reduce Tax By Paying Redundancy Into A Pension?
Pensions can sometimes form part of tax-efficient redundancy planning, but the arrangement needs to be structured correctly.
Rather than receiving the money personally and simply paying it into a pension afterwards, an employer may agree to make a direct employer contribution to a registered pension scheme as part of the termination arrangement.
Qualifying employer pension contributions can receive favourable tax treatment.
However, pension rules still matter, particularly the Annual Allowance and any available carry forward from earlier tax years. Large contributions can create separate tax consequences if the relevant limits are exceeded.
Anyone considering a substantial pension contribution should therefore check their existing pension contributions and wider tax circumstances.
Further information on how pensions are taxed in the UK can be useful when assessing the longer-term tax consequences of moving money into retirement savings.
Are Settlement Agreement Legal Fees Taxable?
Legal fees connected with a settlement agreement can receive favourable tax treatment in certain circumstances.
Where your employer pays qualifying legal costs directly to your solicitor in connection with your termination settlement, those costs can normally be paid without Income Tax or National Insurance being charged to you.
This is different from an employer simply giving you additional cash and expecting you to pay your solicitor yourself.
The wording and payment structure should therefore be clear within the settlement agreement.
Can You Get The £30,000 Tax-Free Allowance More Than Once?
The £30,000 exemption is not necessarily a once-in-a-lifetime allowance, but connected payments cannot simply be separated to create multiple exemptions.
Termination payments may need to be combined where they relate to:
- The same employment
- Different employments with the same employer
- Employments with associated employers
For example, if connected qualifying termination payments total £50,000, splitting them into two payments of £25,000 does not normally create two separate £30,000 exemptions.
Only £30,000 of the combined qualifying amount would generally fall within the threshold.
Separate redundancies from genuinely unrelated employers can have different treatment, so complex cases may require professional tax advice.
How Are Non-Cash Benefits Taxed?
Some redundancy packages include assets or benefits rather than cash.
For example, your employer might allow you to keep:
- A company car
- Computer equipment
- Other company property
Where a non-cash benefit forms part of the qualifying termination award, its taxable value can count towards the £30,000 threshold.
Suppose you receive £29,000 in qualifying cash compensation and keep an asset valued at £3,000.
Your qualifying package is effectively £32,000, meaning £2,000 potentially sits above the tax-free threshold.
Can Redundancy Pay Affect Universal Credit?
Yes. Redundancy pay can affect Universal Credit because money retained after receiving the payment can be treated as capital.
For Universal Credit:
- Capital below £6,000 normally does not reduce your award
- Capital between £6,000 and £16,000 can reduce your monthly Universal Credit
- Capital above £16,000 normally prevents entitlement, subject to specific exceptions and transitional rules
A redundancy lump sum can therefore affect benefits even where some or all of it was tax-free.
You should report changes in savings and capital to the DWP rather than assuming redundancy compensation is ignored. For more information, see how capital can affect means-tested benefits.
2026 Redundancy Pay Limits And Tax Rules
The statutory redundancy limits changed from 6 April 2026.
According to Acas’ current statutory redundancy pay limits:
| Rule | 2026/27 |
|---|---|
| Maximum Weekly Pay Used | £751 |
| Maximum Years Counted | 20 Years |
| Maximum Statutory Redundancy Pay | £22,530 |
| Qualifying Termination Payment Tax Exemption | £30,000 |
Statutory redundancy entitlement is generally calculated as:
- Half a Week’s Pay For each full year of employment when you were under 22
- One Week’s Pay For each full year when you were aged 22 to 40
- One And A Half Week’s Pay For each full year when you were aged 41 or over
The calculation uses a maximum of 20 years’ service.
The £751 weekly limit should not be confused with the £30,000 tax threshold. One determines the maximum statutory redundancy entitlement, while the other relates to the tax treatment of qualifying termination payments.
Conclusion
You do pay tax on some redundancy payments in the UK, but genuine redundancy compensation can normally benefit from a £30,000 tax-free threshold.
The biggest mistake is treating the entire final payment as redundancy compensation. PILON, PENP, holiday pay, unpaid wages, bonuses and similar earnings are normally taxable separately.
For 2026/27, employees should also check the updated £751 statutory weekly cap, their tax code, whether the payment was made before or after their P45 and how the taxable amount affects their annual Income Tax band.
If a large payment, pension contribution or settlement agreement is involved, professional tax advice can be worthwhile before the payment structure is finalised.
Frequently Asked Questions
Is Redundancy Pay Taxable In The UK?
The first £30,000 of qualifying redundancy and termination compensation is usually tax-free. Any qualifying amount above £30,000 is normally subject to Income Tax.
Do You Pay National Insurance On Redundancy Pay?
Employees generally do not pay NI on genuine termination compensation, including the portion above £30,000. However, PILON, PENP, wages and holiday pay can attract normal NI.
Is PILON Taxable?
Yes. Payment in lieu of notice is treated as employment income and is normally subject to both Income Tax and National Insurance.
Can Redundancy Pay Push Me Into A Higher Tax Bracket?
Yes. The taxable portion is added to your other taxable income, so part of your redundancy package could fall into a higher Income Tax band.
Why Was My Redundancy Payment Taxed At 40%?
A large taxable payment can temporarily or ultimately fall within the higher-rate band. Payments after a P45 may also be processed using an 0T tax code, which can increase the initial deduction.
Can I Claim Tax Back From A Redundancy Payment?
Potentially. If too much PAYE was deducted, HMRC may refund it through PAYE, after the tax year or through a P50 claim where you meet the conditions.
Is Redundancy Pay Taxed Differently After A P45?
Yes. A taxable payment made after your P45 is normally processed using an 0T week 1/month 1 tax code, which can result in a higher initial tax deduction.
