Pay for your notice period during redundancy is taxed as normal earnings, with Income Tax and Class 1 National Insurance deducted through PAYE, and this is true whether you work the notice or your employer pays you in lieu of it. The tax break attached to redundancy sits elsewhere: the first £30,000 of a genuine termination award is free of Income Tax.1GOV.UK. Tax on Termination Payments – What You Pay Tax and National Insurance On How your employer splits a redundancy package between those two pots decides how much of it you actually keep.
Working Your Notice Period
If you stay in the job through your notice, the money you earn is legally identical to your regular salary. The Income Tax (Earnings and Pensions) Act 2003 classifies it as general earnings, so your employer runs Income Tax and Class 1 National Insurance through PAYE exactly as before.2GOV.UK. Employment Income Manual – Section 7(3) ITEPA 2003 Knowing the job is ending changes nothing about how the pay is treated.
Your rate depends on where total earnings fall within the Income Tax bands. For 2025–26, the first £12,570 is covered by the personal allowance, earnings from £12,571 to £50,270 are taxed at 20%, income from £50,271 to £125,140 at 40%, and anything above £125,140 at 45%.3GOV.UK. Income Tax Rates and Personal Allowances Scotland sets its own bands, so Scottish taxpayers should check those separately.
Payment in Lieu of Notice
When your employer ends the contract straight away and pays you a lump sum to cover the notice you would otherwise have worked, that lump sum is a Payment in Lieu of Notice (PILON). Before April 2018, tax treatment of PILONs turned on how the employment contract was drafted, and some escaped Income Tax and National Insurance altogether. That is no longer possible.4GOV.UK. New Rules for Taxation of Termination Payments
Since 6 April 2018, every PILON is taxable as earnings, whatever the contract calls it. Both Income Tax and Class 1 National Insurance are deducted before the money reaches you, and employers cannot sidestep this by labelling the sum as damages or dressing it up some other way. The point of the 2018 change was to make sure the tax bill is the same whether you work your notice or leave early.4GOV.UK. New Rules for Taxation of Termination Payments
How the Taxable Notice Slice Is Worked Out
When a redundancy package arrives as a single lump sum, your employer has to identify the portion that represents unworked notice before anything can qualify for the £30,000 threshold. That figure is the Post-Employment Notice Pay (PENP), set out in Section 402D of the Income Tax (Earnings and Pensions) Act 2003.5HM Revenue & Customs. Employment Income Manual – Section 402D ITEPA 2003 Whatever falls into PENP is taxed as normal earnings, with full Income Tax and National Insurance.
The formula is ((BP × D) ÷ P) − T. Four variables drive it:
- BP is your gross basic pay for the last pay period ending before the termination trigger date. Bonuses, commissions, and benefits in kind are excluded.
- D is the number of calendar days in the notice period you did not work. If contractual notice is 12 weeks and you worked four, D covers the remaining eight weeks.
- P is the number of calendar days in your last pay period. For someone on monthly pay running 1 March to 31 March, P is 31.6GOV.UK. PENP Formula – How to Calculate P
- T is any part of the termination payment already taxed as earnings for the notice period, which stops the same money being taxed twice.
A common mistake is treating P as the days you actually worked during notice. It isn’t. P is the length of your last pay period, which for most people is roughly 30 or 31 days if you are paid monthly, or 7 days if you are paid weekly. Getting P wrong distorts the taxable slice and can leave the employer facing underpaid tax plus interest.
If the PENP calculation produces a negative number, notice pay is treated as zero.7legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 402D That happens when you have already worked most or all of your notice before the lump sum is paid, and it means more of the overall package can shelter under the £30,000 threshold.
The £30,000 Tax-Free Redundancy Threshold
Once the PENP portion has been stripped out and taxed as earnings, whatever remains counts as a termination award. The first £30,000 of that award is exempt from Income Tax.8legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 403 Several kinds of payment sit within this threshold:
- Statutory redundancy pay, which is the amount your employer must pay by law based on age, length of service, and weekly pay.
- Enhanced redundancy pay, meaning anything your employer offers above the statutory minimum.
- Ex-gratia payments, which are goodwill lump sums going beyond what the contract or statute requires.
- Non-cash benefits, such as a company laptop or phone you keep after employment ends.1GOV.UK. Tax on Termination Payments – What You Pay Tax and National Insurance On
The £30,000 limit is cumulative. If you receive £15,000 of statutory redundancy and a £20,000 enhanced payment, the combined £35,000 leaves £30,000 tax-free and the remaining £5,000 taxed at your marginal rate.9GOV.UK. Employment Income Manual – Section 403(1) ITEPA 2003 The aggregation covers multiple termination payments from the same employment, so a settlement cannot be split into instalments to stay under the cap.
National Insurance on Amounts Above £30,000
Anything above £30,000 is taxed at your marginal Income Tax rate, but employee Class 1 National Insurance does not apply to the excess. Compared with regular salary, where both taxes bite, that is a real advantage.1GOV.UK. Tax on Termination Payments – What You Pay Tax and National Insurance On
Your employer, though, does pay Class 1A National Insurance on the portion of the termination award above £30,000.10GOV.UK. 2025 – Class 1A National Insurance Contributions on Benefits in Kind, Termination Payments and Sporting Testimonial Payments That charge was introduced by the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019. It does not come out of your pocket, but some employers factor it into the overall package they will offer, so it is worth being aware of if you are negotiating.
What to Check on Your Payslip and Settlement
The split between taxable notice pay and tax-free redundancy pay is not always visible on a payslip or settlement letter. Ask your employer for a written breakdown showing the PENP calculation, the amount treated as earnings, and the amount falling under the £30,000 threshold. If you worked part of your notice, PENP should reflect only the unworked days.
Check your tax code after redundancy. An emergency code or an incorrect cumulative earnings figure can lead to over-deduction, especially when a lump sum pushes you into a higher band for that single pay period. Overpaid tax can be reclaimed from HMRC after the tax year ends, but correcting the code early avoids the wait. If you think your employer has applied the wrong treatment to your redundancy package, raise it with them first; if that goes nowhere, contact HMRC directly so you are not left with an unexpected bill later.