Receiving a redundancy payment is a significant financial event, and understanding the tax implications can make a real difference to your planning. The good news is that a substantial portion of most redundancy payments is tax-free — but the rules have specific boundaries that are worth understanding clearly.
The £30,000 Tax-Free Threshold
The headline rule is straightforward: the first £30,000 of a qualifying redundancy payment is free from income tax. This applies to both statutory redundancy pay and any enhanced redundancy payment your employer offers. The £30,000 threshold has remained unchanged for many years and applies to the total termination payment, not per employer or per year.
If your total redundancy payment is £30,000 or less, you won't pay any income tax on it. Most statutory redundancy payments fall well within this limit — the maximum statutory entitlement for 2025/26 is £19290 (30 weeks at the £643 cap), which is comfortably below £30,000.
What Counts as a "Redundancy Payment"?
Not everything you receive when leaving a job qualifies for the £30,000 exemption. The tax-free treatment applies specifically to compensation for loss of employment — that includes statutory redundancy pay and the genuine redundancy element of any enhanced package. However, certain other payments that might come at the same time are treated differently.
Payments that are always taxable as normal earnings include: your final salary up to your leaving date, any outstanding holiday pay, pay in lieu of notice (PILON) where you have a contractual right to it, and any bonus payments. These are taxed through PAYE as normal, with income tax and National Insurance deductions. They do not count toward the £30,000 exemption because they are earnings you were entitled to regardless of the redundancy.
Enhanced Redundancy and the £30,000 Limit
If your employer offers an enhanced redundancy package — for example, three weeks' pay per year of service instead of the statutory rate — the total payment still benefits from the £30,000 exemption. However, once the combined total exceeds £30,000, the excess is taxed as income through PAYE.
For example, if you receive a £45,000 enhanced redundancy payment, the first £30,000 is tax-free and the remaining £15,000 is added to your income for the tax year and taxed at your marginal rate. Depending on your other income, this could push you into a higher tax band for that year. Our enhanced redundancy calculator helps you compare offers and understand the tax position.
National Insurance on Redundancy Pay
Statutory redundancy pay is completely exempt from National Insurance contributions — both employee and employer NICs. For amounts above £30,000, employer NICs are due from April 2020 onwards, but employee NICs are not charged on any part of a genuine redundancy payment. This is a genuine benefit — your employer pays more, but it doesn't affect your take-home figure beyond the income tax on the excess.
Pay in Lieu of Notice (PILON)
Since April 2018, all payments in lieu of notice are taxable, regardless of whether PILON is mentioned in your contract. Previously, non-contractual PILON could benefit from the £30,000 exemption, but this is no longer the case. Your employer should calculate "post-employment notice pay" (PENP) — basically what you would have earned during your notice period — and tax this as normal earnings. Only the amount above PENP benefits from the £30,000 exemption. See our notice period guide for more details.
Pension Contributions and Redundancy
One legitimate way to reduce the tax impact of a large redundancy payment is to ask your employer to pay some or all of the amount exceeding £30,000 directly into your pension. Employer pension contributions are not subject to income tax or National Insurance (though they count toward your annual allowance). This strategy requires your employer's agreement and should be arranged before the payment is made. Seek professional advice before going down this route.
Common Mistakes
The biggest mistake is assuming your entire leaving package is tax-free up to £30,000. Only the genuine redundancy element qualifies — final salary, holiday pay, and contractual PILON are always taxed. Another common error is not planning for the tax bill on amounts above £30,000, which can result in an unexpected shortfall. Finally, some people don't realise that the £30,000 is a lifetime allowance per termination, not per year — if you receive staged payments across two tax years, the total combined must still fall under £30,000 for the exemption.
Frequently Asked Questions
Do I need to declare statutory redundancy pay on my tax return?
If your total redundancy payment was £30,000 or less and your employer has dealt with it through PAYE, you generally don't need to do anything. If the payment exceeded £30,000 and tax wasn't fully deducted at source, you may need to report it.
Can the £30,000 threshold change?
Yes, the government can change it through legislation, although it has remained at £30,000 for many years. There have been periodic discussions about increasing it in line with inflation, but no changes have been made as of the 2025/26 tax year.
Does Universal Credit affect my redundancy pay?
Redundancy pay itself is treated as capital, not income, for Universal Credit purposes. However, if it takes your savings above £16,000, you won't be eligible for Universal Credit until your capital drops below this threshold.