How is redundancy pay taxed above £30,000?

Full answer

Redundancy payments benefit from a valuable tax exemption, but the rules around exactly what qualifies and how amounts above the threshold are treated catch many people out. **The £30,000 tax-free exemption** Genuine redundancy payments (both statutory redundancy pay and any additional contractual or discretionary enhanced redundancy payment) are tax-free up to a combined total of £30,000 -- this exemption is per redundancy event, not an annual allowance, and covers the combined total of statutory and enhanced elements together, not £30,000 each. **What happens above £30,000** Any amount of the redundancy payment above £30,000 is added to your other income for the tax year and taxed at your marginal Income Tax rate (20%, 40% or 45% depending on your total income) -- this is usually deducted by your employer through payroll before you receive the payment. **Employer NI on the excess (since April 2020)** Since April 2020, employers must pay Class 1A National Insurance (13.8%... note: rate figures should be checked against current employer NI rate) on the portion of a termination payment above £30,000 -- however, this employer NI liability does not create an employee National Insurance charge, so the employee's own take-home amount is only reduced by Income Tax, not NI, on the excess. **What counts as genuine redundancy** The £30,000 exemption applies specifically to genuine termination payments compensating for loss of employment -- it does NOT apply to payments in lieu of notice that are contractual (these are taxed as normal earnings), holiday pay owed, or bonuses that would have been paid regardless of the redundancy, all of which are taxed as regular employment income through PAYE in the normal way. **PILON -- Post-Employment Notice Pay rules** Since 2018, all payments in lieu of notice (PILON), whether contractual or not, must be calculated and taxed as earnings (subject to full Income Tax and National Insurance) under specific Post-Employment Notice Pay rules -- only the genuinely compensatory element of a termination payment (beyond the notice pay element) can benefit from the £30,000 exemption. **Worked example** Someone receives a £45,000 termination payment, all classed as genuine redundancy compensation (no PILON element). The first £30,000 is entirely tax and NI-free. The remaining £15,000 is added to their income and taxed at their marginal rate -- if this pushes them into the higher rate band, that portion is taxed at 40%, producing £6,000 tax due on the excess. **Practical tip** Ask your employer for a clear breakdown of your termination payment showing exactly how much relates to genuine redundancy compensation (eligible for the £30,000 exemption) versus PILON, holiday pay, or other contractual elements (which are fully taxable) -- this breakdown affects your total tax liability and should be checked carefully against your payslip.

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