Redundancy tax explained: what's tax-free in 2026/27
The tax on a redundancy payment trips up a lot of people. You hear that redundancy is tax-free, then a chunk gets deducted anyway. Both things are true at once, and the difference comes down to what each part of your payment actually is. Here's how HMRC treats a redundancy package, what stays tax-free, and what gets taxed like normal pay.
The £30,000 rule
The headline number is £30,000. The first £30,000 of a genuine redundancy payment is free of Income Tax and National Insurance. That covers your statutory redundancy plus any enhanced amount your employer chooses to add. Statutory redundancy on its own is always below the cap, so it's always tax-free. The £30,000 threshold only starts to matter when an employer pays more than the minimum.
Say your statutory entitlement works out at £8,400 and your employer tops it up to £25,000 as a goodwill gesture. The whole £25,000 falls under £30,000, so none of it is taxed. Push the package to £45,000 and the maths changes. The first £30,000 stays tax-free, and the remaining £15,000 gets taxed.
What counts toward the £30,000
Only the compensation part of your package counts as redundancy for the £30,000 rule. That's money paid because your job is ending, not money you'd earned anyway. Statutory redundancy pay qualifies. So does an employer's discretionary severance payment on top. Contractual redundancy schemes count too, as long as the payment genuinely relates to losing the role.
What doesn't count is anything you were owed as part of doing the job. Those items sit outside the £30,000 and get taxed in full through PAYE, exactly like a normal payslip. The list is short but it catches people out:
- Pay in lieu of notice, whether it's written into your contract or not
- Unused holiday you've built up but not taken
- Bonuses or commission you'd already earned before leaving
- Any outstanding wages up to your last day
Pay in lieu of notice is the big one. Since 2018 all notice pay is taxable, even when your contract doesn't mention it. HMRC uses a calculation called post-employment notice pay to work out the taxable slice, so there's no way to dress notice up as tax-free redundancy anymore.
Worked example: a £45,000 package
Picture someone leaving with a £45,000 total payment. Their contract gives three months' notice, and the employer pays that as a lump sum rather than making them work it. Say the notice element is £11,250. Here's how the money splits:
| Element | Amount | Tax treatment |
|---|---|---|
| Pay in lieu of notice | £11,250 | Taxed through PAYE |
| Redundancy compensation | £33,750 | First £30,000 tax-free |
| Taxable redundancy excess | £3,750 | Taxed at marginal rate |
So £11,250 of notice pay is taxed like salary, and £3,750 of the redundancy sits above the £30,000 line and gets taxed too. The other £30,000 lands in the bank untouched. If the person is a basic-rate taxpayer, the £3,750 excess costs £750 in Income Tax. If that £3,750 tips them into the higher-rate band above £50,270, the portion over the threshold is taxed at 40% instead.
National Insurance on redundancy
Here's a detail worth getting right. The tax-free £30,000 has never carried National Insurance for the employee. But from April 2026 there's a change on the employer side: employer National Insurance now applies to the part of a termination payment above £30,000. That's a cost for the business, not for you, though some employers factor it into how generous an offer they can make.
The taxable slice above £30,000 still doesn't attract employee National Insurance. So on that £3,750 excess in the example, you'd pay Income Tax but no employee NI. Notice pay and holiday pay are different again: they carry both Income Tax and employee National Insurance because they count as earnings.
Watch the higher-rate trap
A large redundancy payment can quietly push you into a higher tax band for the year. The taxable parts, notice pay, holiday pay and any redundancy above £30,000, all get added to whatever else you've earned in the tax year. If you've already had a full salary before being made redundant in, say, month nine, a big taxable payment on top can cross the £50,270 higher-rate threshold.
When that happens, the slice above £50,270 is taxed at 40% rather than 20%. It can feel like an unfair extra bite, but it's just how the annual bands work. If your total income for the year ends up lower than the tax deducted assumed, you can reclaim the difference from HMRC after the tax year ends. A lot of people who leave partway through a year are owed a refund and never claim it.
How the tax reaches HMRC
Your employer handles most of it. They run the taxable elements through payroll, deduct Income Tax and National Insurance where it applies, and pay you the net figure. The tax-free redundancy is paid gross. You'll usually see the split on a final payslip, though some employers issue a separate statement for the redundancy element.
If the numbers look wrong, check your P45 and any payslip for the leaving month. Emergency tax codes sometimes get applied to one-off payments, which means too much tax comes off up front. That's recoverable, but only if you notice it and contact HMRC or wait for the year-end reconciliation.
Pensions can shelter more of it
One legitimate way to keep more of a large payment is to ask your employer to pay part of it straight into your pension. A redundancy payment routed into a registered pension scheme isn't taxed at the point it goes in, and it doesn't use up your £30,000 exemption either. For someone facing a big taxable excess, this can turn a chunk that would have been taxed at 40% into pension savings instead.
There are limits. Your annual pension allowance caps how much can go in tax-efficiently each year, and the rules around carrying forward unused allowance get technical. This is the point where a quick chat with a financial adviser pays for itself, especially if your package runs well into six figures.
Quick checklist before you sign
Before you accept a settlement or redundancy offer, work through the parts. Ask what portion is genuine redundancy compensation and what portion is notice, holiday or bonus. Check whether the offer is stated gross or net, because a headline figure can shrink once the taxable elements are deducted. And run your statutory floor through the redundancy pay calculator so you know the legal minimum you're entitled to before any enhancement.
The tax side is only half the picture. How your notice is handled changes the total too, so it's worth reading our guide on notice periods and redundancy alongside this. And for the full method behind the statutory figure, see how redundancy pay is calculated.
For the official rules on tax and redundancy, HMRC and gov.uk set them out at gov.uk. ACAS also has clear guidance at acas.org.uk.