Is NHS Redundancy Pay Tax Free? The £30,000 Rule and NI

Yes and no: the first £30,000 of an NHS redundancy payment is tax-free, but not every pound in your final payslip counts as redundancy for tax purposes. Notice pay, outstanding holiday pay, and bonuses are taxed as ordinary earnings from the first pound. So whether NHS redundancy pay is tax free in your case depends on how much of the package is genuine compensation for loss of employment and how much is really deferred wages wearing a different label.

The £30,000 Rule

Under Section 403 of the Income Tax (Earnings and Pensions) Act 2003, a termination payment only becomes taxable to the extent it exceeds £30,000.¹ Both your statutory entitlement and the more generous NHS contractual payment sit inside this allowance. If the two together come to £30,000 or less, no income tax is deducted.²

The threshold is cumulative for the same employment. Multiple payments connected to the same redundancy aggregate against the single £30,000 limit. A £25,000 lump sum followed by a £10,000 goodwill payment totals £35,000, and the last £5,000 is taxable.¹ The excess is taxed at your normal rate: 20% at basic rate, 40% at higher rate, or 45% at additional rate.³

What Is Taxed as Earnings Instead

Several elements of a redundancy package do not get the £30,000 protection. They are taxed as normal pay, with income tax and National Insurance deducted before the money reaches you.

Payment in lieu of notice (PILON). If your employer pays you a lump sum instead of asking you to work your notice, that amount is taxable as earnings. Since April 2018 this applies to every PILON, whatever the contract says.
Post-Employment Notice Pay (PENP). Where no contractual PILON exists, the employer still has to calculate the basic pay you would have earned during your unworked notice and tax that as earnings. It stops notice pay from being relabelled as a tax-free termination payment.
Unpaid wages, accrued holiday, and bonuses. Anything owed to you at the point of termination is taxed as ordinary pay.

HMRC brought in the PENP rules to close a gap between employees with carefully drafted contracts and everyone else. The result is that the notice-period element is always taxable, and only the genuine compensation for loss of employment qualifies for the £30,000 exemption.⁴ Your trust’s payroll should separate these components, but check the breakdown to make sure PILON and PENP have not been silently absorbed into your £30,000 allowance.

When an NHS Redundancy Payment Actually Exceeds £30,000

Statutory redundancy pay alone is never taxable. From April 2026 the weekly pay cap sits at £751, producing a statutory maximum of £22,530, comfortably below the threshold.²

The tax question really starts with NHS contractual redundancy under Section 16 of the NHS Terms and Conditions of Service Handbook. You receive one month’s pay for each complete year of reckonable service, up to a maximum of 24 months. Only full years count. Monthly pay is either one-twelfth of annual salary at the termination date or 4.35 times weekly pay, whichever is greater, subject to a salary floor of £23,000 and a cap of £80,000.⁵

For longer-serving staff on higher salaries, that formula moves quickly above £30,000. Someone with 15 years of reckonable service earning £60,000 would receive roughly £75,000 in contractual redundancy, of which £45,000 would be taxable. To qualify for NHS redundancy in the first place you need at least two years (104 weeks) of continuous service, with no break longer than one week measured Sunday to Saturday.⁵

National Insurance

Redundancy pay inside the £30,000 threshold is free of both employee and employer National Insurance. Above the threshold the treatment splits: the employer pays Class 1A National Insurance on the excess, but the employee owes no National Insurance on any part of the redundancy lump sum.⁴ If your redundancy payment is £50,000, you pay income tax on the £20,000 excess and no National Insurance on any of it.⁶

PILON and PENP work differently. Because they are taxed as earnings, they attract both income tax and employee Class 1 National Insurance in the usual way.⁴

The Hidden Personal Allowance Trap

A large payout can cost higher earners more tax than the headline rate suggests. The standard personal allowance of £12,570 starts to taper once adjusted net income passes £100,000, falling by £1 for every £2 over the threshold and disappearing entirely at £125,140.³ The taxable portion of a redundancy payment counts toward adjusted net income. The tax-free £30,000 does not.

Take an £85,000 salary and a £60,000 redundancy payment. The first £30,000 is tax-free. The remaining £30,000 is taxable and stacks on top of salary, pushing adjusted net income to at least £115,000. At that level £7,500 of personal allowance disappears, adding about £3,000 to the tax bill on top of the headline rate. Staff at the top of NHS pay bands receiving the full 24 months of contractual redundancy can be caught by this without warning.

What Payroll Deducts and How to Reclaim Overpaid Tax

Your trust’s payroll applies PAYE to the taxable excess at your current rate and issues a P45 showing the deductions and a breakdown of components. If your income for the year is complex or you fall firmly into higher-rate territory, Self Assessment may be needed to reconcile the final position.⁶

Overpayment is the more common outcome. If you were made redundant partway through the tax year and stay unemployed, PAYE will have assumed your earnings would carry on at the same rate, so too much tax comes off. Once you have been out of work for at least four weeks, you can claim a refund using HMRC’s Form P50. Send the form with Parts 2 and 3 of your P45, and the refund should arrive by post within the same tax year.⁷ It’s worth calling HMRC on 0300 200 3300 first to confirm the supporting information they need.

If you start a new job inside the four-week window, hand Parts 2 and 3 of your P45 to your new employer and any refund flows through PAYE. If you are claiming a taxable benefit such as Jobseeker’s Allowance, the Benefit Office handles the refund rather than the P50 route.⁷

1
Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 403
2
GOV.UK. Redundancy: Your Rights – Tax and National Insurance
3
GOV.UK. Income Tax Rates and Personal Allowances
4
GOV.UK. Income Tax and National Insurance Contributions: Treatment of Termination Payments
5
NHS Employers. NHS Redundancy Arrangements
6
GOV.UK. Tax on Termination Payments – What You Pay Tax and National Insurance On
7
MoneyHelper. Claiming Your Tax Rebate After Losing Your Job