How is redundancy pay taxed in the UK?

Full answer

UK tax law provides a **£30,000 exemption** on qualifying termination payments under Section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). **What counts toward the £30,000 exemption:** - Statutory redundancy pay - Enhanced (contractual or ex-gratia) redundancy pay - Compensation for loss of employment - Payments under a settlement agreement for unfair dismissal **What does NOT qualify (fully taxable and NI-able):** - **Pay In Lieu of Notice (PILON):** Since **April 2018**, all PILON is taxable and subject to NI via the **Post-Employment Notice Pay (PENP)** formula — regardless of whether it's contractual or ex-gratia - **Accrued holiday pay:** Always fully taxable as earnings - **Garden leave:** Taxable as normal earnings - **Bonuses for past performance:** Taxable as earnings **Above £30,000:** The excess over £30,000 is taxed as employment income (20%/40%/45%) but is **not subject to employee NI** — only income tax applies. **Employer NI on amounts above £30,000:** From April 2020, employers pay **employer's Class 1A NI** at 15% on the excess above £30,000 — even though employee NI does not apply. **Self Assessment:** If your total redundancy payment (above £30k) pushes your income over £100,000 or means you have untaxed income, you may need to complete a **SA100 tax return**. **Settlement agreement strategy:** Employment lawyers sometimes structure settlements to maximise the use of the £30,000 exemption — for example, separating compensation for injury to feelings (tax-free if relating to discrimination) from contractual amounts.

Try the calculator

Related guides

• Self Employed Tax Uk