Is Redundancy Pay Taxed in the UK?

Losing your job is hard enough without a surprise tax bill on top. The good news is that UK tax law gives redundancy packages a generous allowance: the first £30,000 is completely tax-free. The catch is that not every part of a leaving package counts towards that £30,000, and the parts that do not, such as notice pay, are taxed like normal wages. This guide explains exactly which parts are taxed, which are not, and how to check whether too much tax was taken.

The £30,000 Tax-Free Rule Explained

The £30,000 limit covers what HMRC calls termination payments: money you receive because your employment has ended, rather than as pay for work. Statutory redundancy pay, enhanced redundancy pay under your contract, ex gratia payments and compensation under a settlement agreement all share the same single £30,000 allowance. It is one allowance per leaving package, not £30,000 per payment type.

If your total termination payments come to £30,000 or less, no income tax is due on them at all. Go above £30,000 and only the excess is taxable. There is also a useful National Insurance point here: no employee National Insurance is charged on termination payments, even above £30,000. Since April 2020 your employer pays employer National Insurance (Class 1A) on the amount above £30,000, but that cost is theirs, not yours.

Statutory redundancy pay itself is worked out from your age, your length of service (up to 20 years) and your weekly pay, which is capped at £751 a week for redundancies on or after 6 April 2026, giving a maximum statutory payment of £22,530. You can check your entitlement in seconds with our redundancy pay calculator. You can also check your rights and entitlement on GOV.UK.

What Counts Towards the £30,000

Payment	Counts towards the £30,000?	Tax treatment
Statutory redundancy pay	Yes	Tax-free within the £30,000
Enhanced or contractual redundancy pay	Yes	Tax-free within the £30,000
Ex gratia payment or settlement agreement compensation	Yes	Tax-free within the £30,000
Pay in lieu of notice (PILON)	No	Taxed as earnings in full
Post-employment notice pay (PENP)	No	Taxed as earnings in full
Accrued holiday pay and unpaid wages	No	Taxed as earnings in full
Bonus or commission already earned	No	Taxed as earnings in full

Notice Pay, PILON and PENP: Taxed Differently

Notice pay is the part that catches most people out. If your employer ends your contract without you working your full notice, the pay for that notice period is taxed as ordinary earnings, with income tax and National Insurance, exactly like a normal payslip. It does not use up any of your £30,000 allowance.

Since April 2018 this is calculated through a rule called post-employment notice pay, or PENP. HMRC works out how much of your package represents basic pay for the notice period you did not work, and that slice is taxed as earnings first. Only what is left after PENP is treated as a termination payment and measured against the £30,000. For example, if your monthly basic pay is £3,000 and you leave immediately with three months of notice untaken, roughly £9,000 of your package is PENP and taxed as earnings, and the rest falls under the £30,000 rule.

Worked Example: A £45,000 Redundancy Package

Say your leaving package is a £45,000 termination payment, with no notice pay element, and you had already earned £30,000 of salary earlier in the same tax year.

Part of the package	Amount	Tax
Tax-free allowance	£30,000	£0
Taxable excess	£15,000	Charged at your income tax rate
National Insurance on the excess	£15,000	£0 (no employee NI)

Your salary used your personal allowance (£12,570) and £17,430 of your basic rate band, leaving £20,270 of the basic rate band free. The £15,000 taxable excess fits inside that, so it is taxed at 20 percent: £3,000 of tax, and you keep £42,000 of the £45,000 package. If your salary earlier in the year was higher, some of the excess would fall into the 40 percent band instead. Your own split depends on everything you earned in that tax year, which is why a two-minute check with the calculator beats guessing.

Why Too Much Tax Is Often Taken, and How to Claim It Back

Employers usually deduct tax from the taxable part through PAYE before paying you. If the payment is made after your P45 has been issued, your employer has to use a 0T tax code on a non-cumulative (Month 1) basis. That code gives you no personal allowance and squeezes the tax bands into a single month, so the amount deducted is often far more than you actually owe.

Do not panic if this happens, the overpayment comes back. If you are not starting a new job straight away, you can claim during the tax year using HMRC form P53 (claim a tax refund for a redundancy or termination payment). Otherwise the difference is sorted out through a later tax code or your Self Assessment return. Keep your P45 and the letter from your employer that breaks the package down, because HMRC may ask how the payment was made up.

Redundancy and National Insurance

To repeat the point that saves people real money: termination payments carry no employee National Insurance at all, including the part above £30,000, so the excess is taxed more lightly than salary. Notice pay and holiday pay are different, they are earnings, so National Insurance applies as normal. If you want to see how National Insurance would look on normal pay at your salary level, try our National Insurance calculator.

Frequently Asked Questions

Figures checked for 2026/27: £30,000 termination payment threshold, weekly pay cap of £751 for statutory redundancy pay from 6 April 2026 (maximum £22,530). This guide is general information, not financial advice. For a personal estimate, use the redundancy pay calculator.