If you are made redundant in the UK, the first £30,000 of qualifying redundancy and termination payments can usually be paid free of Income Tax.
However, not everything in your final payment qualifies for the £30,000 exemption. Payment in Lieu of Notice (PILON), holiday pay, unpaid wages, bonuses, overtime and commission are normally taxed as earnings and may also be subject to National Insurance.
For redundancies on or after 6 April 2026 in England, Scotland and Wales, statutory redundancy pay is calculated using weekly pay capped at £751, with a maximum statutory redundancy payment of £22,530. Northern Ireland has separate statutory redundancy limits, with a weekly pay cap of £783 and a maximum statutory redundancy payment of £23,490.
This 2026/27 guide explains exactly what redundancy pay is tax-free, what is taxable, how the £30,000 limit works and what to check if you think too much tax has been deducted.
Redundancy Pay Tax: Quick Answer
| Payment | Normal tax treatment |
|---|---|
| Statutory redundancy pay | Usually within the £30,000 tax-free termination-payment limit |
| Enhanced/severance redundancy pay | Can qualify toward the combined £30,000 exemption |
| Qualifying amount above £30,000 | Income Tax applies |
| PILON / notice pay | Taxed as earnings |
| Holiday pay | Taxed as earnings |
| Unpaid wages | Taxed as earnings |
| Bonuses, overtime and commission | Taxed as earnings |
| England, Scotland & Wales weekly-pay cap from 6 April 2026 | £751 |
| England, Scotland & Wales maximum statutory redundancy pay | £22,530 |
| Northern Ireland weekly-pay cap | £783 |
| Northern Ireland maximum statutory redundancy pay | £23,490 |
How Much Redundancy Pay Is Tax-Free in the UK?
The first £30,000 of qualifying redundancy or termination payments is usually free from Income Tax.
The £30,000 exemption is one combined limit, not £30,000 for each individual payment. Statutory redundancy pay, qualifying enhanced redundancy payments, severance payments and certain non-cash benefits may all count towards the same threshold.
This can include:
- Statutory redundancy pay
- Enhanced redundancy pay
- Additional severance payments
- Some non-cash benefits provided as part of your redundancy package
The £30,000 limit is a combined limit, not a separate allowance for each type of payment. For example, if you receive statutory redundancy pay and an additional enhanced redundancy payment, both are counted together when applying the £30,000 tax-free threshold.
Non-cash benefits, such as being allowed to keep a company car, laptop, or other asset, are usually given a cash value. This value is added to your redundancy package for tax purposes. If this pushes your total qualifying package above £30,000, the amount above the limit becomes taxable.
Statutory redundancy pay is based on your age, length of service and weekly pay, with length of service capped at 20 years. For redundancies on or after 6 April 2026 in England, Scotland and Wales, weekly pay is capped at £751, meaning the maximum statutory redundancy payment is £22,530. In Northern Ireland, the weekly pay cap is £783 and the maximum statutory redundancy payment is £23,490.
What Parts of a Redundancy Package Are Taxable?
1. Redundancy Pay Over £30,000
If your total qualifying redundancy payment exceeds £30,000, the amount above this limit is subject to Income Tax.
Your employer will usually deduct tax through PAYE before paying you. However, the calculation may not always be exact, especially if your employment ends partway through the tax year. You may need to reclaim overpaid tax or settle any underpayment later.
Qualifying redundancy payments up to £30,000 are usually free from Income Tax and National Insurance. Amounts above £30,000 are subject to Income Tax. Employer Class 1A National Insurance may also apply to the excess, but employee National Insurance is not usually deducted from the qualifying redundancy payment itself.
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
- Commission
Tax and National Insurance will usually be deducted even if you receive these payments after your employment ends.
These payments are not treated as redundancy pay for the £30,000 exemption. They are taxed as normal earnings even if they are paid at the same time as your redundancy payment.
If your role included regular bonuses or commission, these may sometimes be considered when calculating your statutory redundancy pay based on your average earnings. However, if they are paid separately as earnings, they are normally taxed in the usual way.
Is PILON Taxable When You Are Made Redundant?
If your employer releases you from working your notice period, you may receive Payment in Lieu of Notice, commonly known as PILON.
PILON is normally taxable as earnings and subject to Income Tax and National Insurance. HMRC’s Post-Employment Notice Pay rules are designed to make sure that notice pay is taxed, even where your contract does not include a PILON clause.
This means PILON does not usually benefit from the £30,000 tax-free redundancy exemption.
Your employer will usually calculate what you would have earned during your notice period and apply the appropriate deductions through PAYE.
Other genuine non-contractual termination payments may still fall within the £30,000 tax-free redundancy allowance, depending on the nature of the payment.
Do You Pay National Insurance on Redundancy Pay?
National Insurance treatment depends on the type of payment you receive.
Qualifying redundancy and termination payments within the £30,000 exemption are generally not subject to employee National Insurance.
Where qualifying termination payments exceed £30,000, the employer may have to pay Class 1A National Insurance on the excess. The employee does not normally pay employee National Insurance simply because the qualifying redundancy payment exceeds £30,000.
However, payments treated as normal earnings, such as PILON, Post-Employment Notice Pay, holiday pay, unpaid wages and bonuses, can be subject to both Income Tax and National Insurance in the normal way.
Avoid Surprises – Plan Ahead
It’s smart to estimate your redundancy package in advance so you know what’s taxable and what isn’t. This can help you avoid unexpected tax bills or confusion when you receive your final payslip.
Here are two examples to help you understand how the rules work.
Example 1: Tax-Free Redundancy Payment with Taxable PILON
Jason receives £18,000 as redundancy pay and £1,000 as pay in lieu of notice.
| Payment type | Amount | Tax treatment |
|---|---|---|
| Redundancy pay | £18,000 | Tax-free |
| PILON | £1,000 | Taxed as earnings |
| Total received | £19,000 | Only PILON is taxable |
The redundancy payment is within the £30,000 tax-free limit, so no Income Tax is due on that part. The £1,000 PILON is taxed like regular pay.
Example 2: Taxable Redundancy Package Over £30,000
Emma receives £32,000 in redundancy pay and keeps her company car, which has a cash value of £8,000.
| Payment type | Amount |
|---|---|
| Redundancy pay | £32,000 |
| Company car value | £8,000 |
| Total qualifying package | £40,000 |
| Tax-free amount | £30,000 |
| Taxable amount | £10,000 |
In this example, Emma’s total qualifying package is £40,000. The first £30,000 is tax-free, and the remaining £10,000 is taxable.
Overpaying or Underpaying Tax: What You Need to Know
Tax is calculated over 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 correct. Errors can happen, and it is ultimately your responsibility to make sure your tax position is accurate.
Check your final payslip and P45 carefully. Make sure redundancy pay, PILON, holiday pay, bonuses, and unpaid wages are shown separately, as they may have different tax treatment.
If you think you’ve overpaid, you may be due a refund from HMRC. On the other hand, if not enough tax was deducted, you might owe HMRC.
In some cases, HMRC may ask you to complete a Self Assessment tax return at the end of the tax year to settle the position properly.
It’s always worth checking, especially if your circumstances changed during the year, and speaking to a qualified UK tax accountant if you’re unsure.
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 as part of a wider tax planning strategy.
Consider Your Options
If your day-to-day needs are covered, you might want to explore options such as:
- building an emergency savings buffer
- paying down high-interest debts
- covering essential living costs while looking for new work
- reviewing your tax position for the year
- considering pension contributions where appropriate
Each option has potential benefits depending on your goals, income, tax position, and financial circumstances.
Adding to Your Pension
Contributing some of your redundancy payment to a pension may be tax-efficient in certain situations, especially where part of your redundancy package is taxable.
If your redundancy payment is more than £30,000, you may wish to consider whether making a pension contribution could reduce your overall tax bill. In some cases, an employer may agree to make a pension contribution as part of the redundancy arrangement.
However, pension contributions are subject to annual allowance rules, earnings limits, and personal circumstances. Tax and pensions can be complex, so it is important to speak to an independent financial adviser or tax professional before making any decisions.
Final Thought: Take Control with Confidence
Redundancy can be challenging, but understanding your payment and tax implications helps you make informed choices.
The key point is that the first £30,000 of qualifying redundancy pay is usually tax-free, but payments such as PILON, holiday pay, unpaid wages, bonuses, overtime, and commission are normally taxed as regular earnings.
With careful planning and the right advice, you can avoid surprises, check whether you are due a tax refund, and make better decisions about your redundancy package.
