Is redundancy pay taxed? The £30,000 exemption

If you are being made redundant, the first £30,000 of most redundancy payments is tax free. That £30,000 is a combined total covering statutory redundancy pay, any enhanced or contractual severance pay, and non-cash benefits you receive because your job has ended¹.

Not everything in a termination package gets that treatment. Pay in lieu of notice, unpaid wages, holiday pay and bonuses are taxed as normal earnings, with income tax and National Insurance deducted through PAYE¹. So the amount you actually take home depends on how your employer splits the package between compensation and earnings.

Anything above the £30,000 combined total is taxed at your usual rate, as if it were salary¹. The maximum statutory redundancy pay is £22,530 for 2026-27, which sits below the threshold on its own, so most people receiving only the statutory amount pay no tax on it at all².

The first £30,000 of redundancy pay is tax free

The £30,000 exemption is the core rule. You do not usually pay tax on the first combined £30,000 of termination payments, and that figure covers statutory redundancy pay, additional severance or enhanced redundancy payments, and non-cash benefits¹. Statutory redundancy pay on its own is generally tax-free up to £30,000, and since the maximum statutory award is £22,530 for 2026-27, it falls well within the allowance².

The exemption is a tax relief with a long history. Official statistics describe it as applying where payments and benefits on termination of employment are below £30,000, in which case they are not taxed as employment income⁴. The threshold does not apply to any element of the payment that is post-employment notice pay, which is chargeable to income tax⁴.

For most people made redundant on a statutory-only package, the practical effect is simple: the payment arrives without tax deducted. The complications begin when an employer adds severance pay, garden leave, or a payment for agreeing to a restrictive covenant, because those elements are treated differently.

What counts towards the £30,000 exemption

The £30,000 is a combined total, not a per-payment limit. It covers statutory redundancy pay, any additional severance or enhanced redundancy payment, and non-cash benefits¹. If the total of all these comes to £30,000 or less, none of it is taxed as employment income⁴.

Some elements sit outside the allowance entirely. Post-employment notice pay is chargeable to income tax and does not benefit from the £30,000 threshold⁴. The same applies to unpaid wages, holiday pay, bonuses, payments for agreeing to a restrictive covenant, and payments instead of working during notice, all of which are subject to tax and National Insurance¹.

Pay in lieu of notice is taxed as earnings

Pay in lieu of notice is the element that most often catches people out. If your contract allows it, your employer may choose to make you redundant immediately and pay you in lieu of notice, covering all basic pay for the notice period⁵. That payment is treated as earnings, not as compensation, so it is subject to tax and National Insurance¹.

The interaction with the £30,000 allowance is set out in official guidance. If the amount of post-employment notice pay is more than the total of any severance, enhanced redundancy or non-cash benefits you receive, you only pay tax on the amount you actually get¹. In other words, the notice pay is taxed first, and the £30,000 allowance applies to what remains.

There is a further consequence for anyone claiming benefits. You may not be eligible for benefits immediately if you have received a redundancy payment or payment in lieu of notice⁶. Redundancy payments are treated as capital for means-tested benefits, though payments in lieu of earnings or holiday pay are excluded from that calculation⁷.

Worked examples: how much of a payout is taxed

Two official examples show how the split works in practice¹.

In the first, someone receives £10,000 statutory redundancy pay plus £5,000 severance pay, with four weeks of notice not worked. The post-employment notice pay is £2,000, so tax and National Insurance are payable on £2,000 of the severance payment. The remaining £13,000 of the total is tax free because it is under £30,000¹.

In the second, someone receives £10,000 statutory redundancy pay plus £3,000 severance pay, with earnings of £1,000 per week and four weeks of notice not worked. Here the post-employment notice pay is £4,000, which is more than the severance, so the full £3,000 of the severance payment is taxable. The £10,000 statutory redundancy pay remains tax free because the total is under £30,000¹.

The pattern is consistent: notice pay is taxed first, and the £30,000 allowance shelters the rest.

Redundancy pay above £30,000 is taxed like your salary

Once the combined total of statutory redundancy pay, severance pay and non-cash benefits passes £30,000, the excess is taxed as income. You will pay tax on any amount over a combined total of £30,000¹. Redundancy pay including any severance pay under £30,000 is not taxable⁸.

The rate you pay depends on your total income for the year. The payment is added to your other earnings, so it can push you into a higher band. If you are a basic rate taxpayer, the excess is taxed at 20%, though the exact amount depends on your personal allowance and other income.

There is a separate cap on the statutory element. If you were made redundant on or after 6 April 2026, your weekly pay is capped at £751 when calculating statutory redundancy pay³. Length of service is capped at 20 years⁸. If you are aged 41 or over, you get one and a half weeks gross pay for every complete year of employment with the same employer⁹.

For anyone on a low income or claiming means-tested benefits, a redundancy payment can affect entitlement. If your redundancy payments give you over £6,000 in savings, you may have to pay more Council Tax¹⁰. Any redundancy payment you get might affect what benefits you are entitled to¹¹.

How redundancy pay affects pension contributions

Redundancy pay is not pensionable earnings. You receive it as a lump sum payment from your employer, and it is not counted as pensionable earnings, so it cannot be paid through salary sacrifice¹². That means you cannot use salary sacrifice to reduce the tax on a redundancy payment.

You can still pay into a pension from the money you receive. You usually get tax relief on money you pay into a pension¹³. All pension contributions, including those made via salary sacrifice, remain exempt from income tax, subject to the annual allowance of £60,000¹². Paying part of a taxable redundancy payment into a pension can therefore reduce the tax you owe, though the annual allowance limits how much relief you can claim in a year.

If you are approaching retirement, the age at which you can access a defined contribution pension is rising. From 6 April 2028, the minimum pension access age rises from 55 to 57, unless a protected pension age applies. Any taxable money you take from your pension will be added to your other income for that year and taxed at the relevant income tax band¹⁴.

Where to get help

If you are facing redundancy and are unsure how your payment will be taxed, free and impartial help is available. Citizens Advice and Advice NI provide guidance on redundancy rights and benefits. StepChange offers debt advice if your income is about to change¹¹. MoneyHelper, the government-backed money guidance service, covers redundancy and tax.

If you believe your employer has taxed your redundancy payment incorrectly, you can ask HMRC to check the calculation. If you have overpaid tax, you may be able to claim a refund. For anyone whose income drops after redundancy, checking your tax code is worthwhile, because an emergency code can result in too much tax being taken from a new job or a pension.