If you’ve been made redundant and received a redundancy payment, you may be wondering whether it’s subject to tax. The good news is: up to £30,000 of redundancy pay is tax-free. However, not every part of your redundancy package enjoys this tax break. Payments such as holiday pay or pay in lieu of notice (PILON) are treated as regular income and taxed accordingly.
What’s Tax-Free?
- Non-cash benefits (e.g., a company car or laptop) are assigned a cash value and added to your redundancy total. If this pushes your overall package above £30,000, the excess becomes taxable.
What Will Be Taxed?
1. Redundancy Pay Over £30,000
If your total redundancy payment exceeds £30,000, the amount above this limit is subject to income tax.
Your employer will usually deduct this automatically, but the calculation might not be exact. You may need to reclaim overpaid tax or settle any shortfall later.
2. Holiday Pay, Unpaid Wages, Bonuses, and Overtime
These are treated as standard earnings and taxed in full. This includes:
- Holiday pay
- Unpaid salary
- Bonuses
- Overtime
Tax and National Insurance will be deducted even if you receive these payments after your employment ends.
If your role included regular bonuses or commissions, they may be used to calculate your redundancy pay based on your average earnings over the last 12 weeks. If so, they might count toward the £30,000 tax-free allowance but only if they form part of your usual weekly pay.
Tax on Pay in Lieu of Notice (PILON)
If your employer releases you from working your notice period, you may receive a Payment In Lieu of Notice (PILON).
- All contractual and non-contractual PILON payments are subject to income tax and National Insurance.
- Your employer will calculate what you would’ve earned during your notice period and apply the appropriate deductions.
- Non-contractual payments outside of PILON can still fall within the £30,000 tax-free redundancy allowance.
Avoid Surprises – Plan Ahead
It’s smart to estimate your redundancy package in advance so you know what’s taxable and what isn’t. Here are two examples to help you understand:
Example 1: Tax-Free Payment
Jason receives £18,000 as redundancy pay and £1,000 as pay in lieu of notice.
- The £18,000 is tax-free.
- The £1,000 PILON is taxed like regular income.
Example 2: Taxable Redundancy Package
Emma receives £32,000 in redundancy pay and keeps her company car, worth £8,000.
- Total value: £40,000
- Tax-free portion: £30,000
- Taxable portion: £10,000
Overpaying or Underpaying Tax: What You Need to Know
Tax is calculated over the course of the full tax year, so if you’ve left a job or stopped working partway through, there’s a chance you may have paid too much or too little.
While your employer handles tax deductions through PAYE, it’s important not to assume the figures are always spot on. Errors can and do happen, and it’s ultimately your responsibility to make sure everything adds up.
If you think you’ve overpaid, you may be due a refund. On the other hand, if not enough tax was deducted, you might owe HMRC. In either case, HMRC may ask you to complete a Self Assessment tax return at the end of the tax year to get things settled properly.
It’s always worth checking, especially if your circumstances changed during the year.
How to Make the Most of Your Redundancy Payment
Receiving a redundancy payment can be a significant financial moment, often marking both the end of one chapter and the beginning of another. While it’s natural to focus on covering immediate expenses, if you don’t need the full amount right away, it’s worth thinking strategically about how you use it.
Consider Your Options
If your day-to-day needs are covered, you might want to explore options like building your savings, paying down high-interest debts, or even boosting your pension contributions. Each choice has potential benefits, depending on your goals and financial situation.
Adding to Your Pension
Contributing some or all of your redundancy pay to your pension could be a smart, tax-efficient move.
If you’re part of your employer’s pension scheme and your redundancy payment is more than £30,000, you may be able to reduce your tax bill by asking your employer to pay the excess directly into your pension.
However, tax and pensions can be complex areas, and there are limits to how much you can contribute while still receiving tax relief. That’s why it’s a good idea to speak to an independent financial adviser before making any decisions, they can help you navigate the rules and make the most of your redundancy package.
Final Thought: Take Control with Confidence
Redundancy can be challenging, but understanding your payment and tax implications helps you make informed choices. With a bit of planning and the right advice, you can turn this transition into a valuable opportunity for your future.
