Yes, redundancy pay is taxable, but only above a threshold. The first £30,000 of a genuine redundancy payment is free of income tax, and no employee National Insurance is due on any part of it no matter how large the payment. Anything above £30,000 is added to your taxable income for the year and taxed at your marginal rate. The catch is that a redundancy package usually bundles several types of payment together, and not all of them qualify for the £30,000 exemption.
What the £30,000 Tax-Free Amount Covers
Section 401 of the Income Tax (Earnings and Pensions) Act 2003 lets you receive up to £30,000 tax-free from payments connected to the loss of your job.1GOV.UK. EIM13500 – Termination Payments and Benefits: Section 401 ITEPA 2003 That includes statutory redundancy pay, any enhanced or ex-gratia payment your employer adds on top, and non-cash benefits like company property you keep after leaving.
The £30,000 is a combined ceiling for the whole redundancy, not an allowance that resets for each payment. If your employer pays £10,000 in statutory redundancy and a £35,000 enhanced payment, the first £30,000 of that £45,000 total is tax-free and the remaining £15,000 is taxable.2Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 401 Your employer should apply this split before running your final pay, but check the figures. Errors here always favour HMRC first.
The Rate You Pay on Anything Above £30,000
The taxable slice stacks on top of everything else you have earned in the tax year. For 2025–26, the rates are 20% on taxable income up to £50,270, 40% from £50,271 to £125,140, and 45% above that.3GOV.UK. Income Tax Rates and Personal Allowances A payment made near the end of the tax year, on top of a full year’s salary, can push part of the excess into a higher band even if you normally sit at the basic rate.
National Insurance
You pay no employee National Insurance on any part of a genuine redundancy payment, including the portion above £30,000.4GOV.UK. Tax on Termination Payments: What You Pay Tax and National Insurance On On a £50,000 redundancy, that saves you a meaningful sum compared with receiving the same money as salary.
Your employer pays Class 1A National Insurance on the amount above £30,000. That is their cost, not yours, but it can influence how a package is structured, because a larger ex-gratia payment costs the employer more than the headline figure suggests.
The Parts of Your Package That Are Taxed as Normal Salary
This is where people get caught out. Several items commonly lumped in with “redundancy pay” are actually taxed as earnings, with both income tax and National Insurance deducted, before the £30,000 exemption is applied to what remains.
Pay in Lieu of Notice
Since April 2018, all pay in lieu of notice is taxed as ordinary earnings, whether or not your contract mentions it.5GOV.UK. New Rules for Taxation of Termination Payments Employers calculate the taxable notice pay using the Post-Employment Notice Pay formula in Section 402D of the Act,6Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 402D which uses your basic pay to work out what you would have earned during any unworked notice period. That amount is taxed as salary before the rest of your package is measured against the £30,000 limit. If a three-month notice period is paid rather than worked, several thousand pounds you might think of as redundancy money is really taxed as income.
Holiday Pay, Bonuses, and Commission
Accrued but untaken holiday is taxed as standard salary, with full income tax and National Insurance. So are bonuses and commission earned in your final weeks. None of these amounts reduces or eats into the £30,000 exemption; they sit outside it entirely and are taxed as regular earnings.
How Statutory Redundancy Pay Is Worked Out
Statutory redundancy pay is the legal minimum your employer owes you if you have at least two years’ continuous service. The amount depends on your age, length of service, and weekly pay, with weekly pay capped at £719 for 2025–26 and a maximum statutory payout of £21,570.7Acas. Step 6: Work Out Redundancy Pay – Managing a Redundancy Process These caps are reviewed annually.
The calculation covers up to 20 years of service and works backwards from your redundancy date:
- Age 41 and over: 1.5 weeks’ pay for each full year of service
- Age 22 to 40: 1 week’s pay for each full year
- Under 22: half a week’s pay for each full year
Statutory redundancy pay is tax-free, and in most cases it fits comfortably inside the £30,000 allowance. It only starts to matter for tax when your employer tops it up: if you get £10,000 statutory plus a £25,000 enhanced payment, the combined £35,000 puts £5,000 above the threshold and into taxable territory.4GOV.UK. Tax on Termination Payments: What You Pay Tax and National Insurance On
Settlement Agreements
If your redundancy is wrapped up in a settlement agreement, the £30,000 exemption still applies to the termination element, provided the payment isn’t something your employer already owed you contractually. Anything in the agreement representing notice pay, unpaid wages, or contractual entitlements is taxed as earnings first, and the £30,000 limit is applied only to what’s left. Payments compensating for injury to feelings in a discrimination claim may fall outside the cap entirely, but the treatment depends on the exact wording. Your employer has to pay for you to take independent legal advice on a settlement agreement, so use it.
Reclaiming Tax You’ve Overpaid
Overpayment is very common after redundancy. Payroll systems tax your final pay as though you’ll carry on earning at the same rate for the rest of the tax year. If you’re made redundant in September and then spend months out of work, tax has been deducted on income you never received.
If You’ve Been Out of Work for Four Weeks or More
If you’ve been unemployed for at least four weeks and aren’t claiming taxable state benefits, you can submit a P50 to HMRC to claim an early refund.8HM Revenue & Customs. Claim Back Income Tax When You’ve Stopped Working (P50) Filing online is fastest. HMRC asks that you allow up to 14 days for a reply before chasing.
If You Find a New Job
A new employer’s payroll will usually correct the overpayment over the following pay periods as your cumulative tax position updates. Give them your P45. If anything is still owed to you at the end of the tax year, HMRC reconciles it through a P800 calculation or by adjusting your tax code the following year. If you file a Self Assessment return, you can claim the refund through it directly.
When Timing Hits Hardest
A redundancy early in the tax year, with time spent out of work afterwards, almost guarantees an overpayment because tax has been withheld against months of income that never arrived. Refunds of several hundred pounds are typical, and four-figure refunds are not unusual for higher earners made redundant mid-year. Check your position after 5 April even if you started a new job quickly.