Tax on Redundancy Pay

The first £30,000 is tax-free

The first £30,000 of your statutory (legal minimum) redundancy pay is completely free of Income Tax and National Insurance. This is one of the most generous tax treatments available in UK employment law.

This applies to statutory redundancy pay only — not to any additional payments your employer may make above the legal minimum, which are treated as normal earnings.

Anything above £30,000 is taxable

The portion of your statutory redundancy pay that exceeds £30,000 is treated as earnings and is subject to:

• Income Tax — at your marginal rate (20%, 40%, or 45% depending on your total income)
• Employee's National Insurance — at the standard rate (8% on earnings between £242 and £967 per week, 2% above £967)
• Employer's National Insurance — your employer pays this, not you

HMRC classes statutory redundancy pay as a "gain" rather than regular earnings, but the tax treatment above £30,000 is the same as regular employment income.

Enhanced and contractual redundancy payments

If your employer offers more than the statutory minimum — known as enhanced or contractual redundancy — the additional amount is treated differently:

• The £30,000 tax-free allowance applies only to the statutory element of your payment
• Anything above the statutory amount is treated as fully taxable earnings — not just the amount above £30,000, but the entire enhanced portion
• Some employers structure enhanced payments as a separate "ex gratia" payment — this may affect how HMRC treats it

Ask your employer for a breakdown of your payment showing which part is statutory redundancy pay (tax-free up to £30,000) and which part is an enhanced or ex gratia payment (fully taxable).

Example calculations

Example 1 — below the £30,000 threshold:

Employee receives £18,000 statutory redundancy pay. Entire £18,000 is tax-free. Net receive: £18,000.

Example 2 — above the threshold:

Employee receives £45,000 statutory redundancy pay.

• £30,000 is tax-free
• £15,000 is taxable — at 20% basic rate: £3,000 tax
• National Insurance also applies to the taxable portion
• Approximate net: £45,000 − £3,000 (tax) − NI = approx £41,500

Example 3 — enhanced scheme above statutory:

Employee receives £20,000 statutory + £15,000 enhanced = £35,000 total.

• £30,000 of the statutory element is tax-free
• The remaining £5,000 of statutory pay above £30,000 is taxable
• The full £15,000 enhanced payment is fully taxable
• Total taxable: £20,000 — taxed at marginal rate

Notice pay and PILON — how they are taxed

Notice pay and payments in lieu of notice (PILON) are not the same as statutory redundancy pay and are taxed differently:

• Notice pay (worked or paid): treated as normal earnings — subject to Income Tax and National Insurance from the first pound
• Contractual PILON: treated as earnings — subject to tax and NI from the first pound
• Statutory notice pay: if your employer did not give full notice and you receive a statutory notice payment, this is also treated as earnings

Your P45 and final payslip should show each element separately — statutory redundancy pay, notice pay, and any enhanced payment — so you can see exactly what has been taxed and why.

What your payslip should show

Your final payslip should clearly break down:

• Statutory redundancy pay — and whether it falls within or above the £30,000 threshold
• Notice pay or PILON — and the tax treatment applied to each
• Enhanced or ex gratia payment — and confirmation it is fully taxable
• Income Tax deducted — showing the marginal rate applied to each element
• National Insurance — showing what has been deducted and from which element

If your payslip does not break these elements down clearly, ask your employer or HR department for a more detailed statement.