Answers · UK 2025/26

How much of a termination payment is tax-free under the £30,000 exemption?

The first £30,000 of a genuine termination payment — compensation for loss of employment, not earnings you were already contractually owed — is free of Income Tax and employee National Insurance, though employer Class 1A National Insurance applies to any amount above £30,000. Statutory and contractual redundancy pay, and ex-gratia compensation, can qualify; PENP, unpaid salary, holiday pay and bonuses cannot.

Last updated: 4 July 2026Last reviewed: 4 July 2026How we verify

Full answer

The £30,000 termination payment exemption is one of the most valuable, though frequently misunderstood, reliefs in UK employment taxation, but it only applies to genuine compensation for the loss of employment, not to any element of a payout that represents money the employee was already contractually entitled to receive regardless of the termination. Qualifying amounts that can benefit from the exemption include: statutory redundancy pay (calculated by age, length of service and weekly pay, capped at a maximum weekly figure set annually), enhanced or contractual redundancy pay above the statutory minimum, and genuine ex-gratia compensation payments for loss of office or unfair/wrongful dismissal claims being settled. Amounts that cannot benefit from the exemption, and are always fully taxed as ordinary earnings instead, include: Post-Employment Notice Pay (PENP, the portion representing notice period pay), any unpaid salary or wages up to the termination date, accrued but untaken holiday pay, contractual bonuses or commission already earned, and payments in lieu of benefits that were contractually due (such as a car allowance). Worked example: an employee is made redundant with a total termination payment of £45,000, made up of £8,000 statutory and enhanced redundancy pay, £5,000 PENP (one month's unworked notice), £2,000 for unused holiday, and £30,000 ex-gratia compensation. The £5,000 PENP and £2,000 holiday pay are fully taxed as earnings (£7,000 total, subject to Income Tax and employee/employer NI). The remaining £38,000 (£8,000 redundancy plus £30,000 ex-gratia) is tested against the £30,000 exemption: £30,000 is entirely tax-free (no Income Tax, no employee NI), and only the excess £8,000 is taxed as income, with employer-only Class 1A NI due on that £8,000 excess (no employee NI is ever due on amounts within the termination payment category, even above £30,000, which is a specific and valuable feature distinguishing termination payments from ordinary earnings). Because the £30,000 threshold is a lifetime limit per employment ending, not an annual allowance, and applies per employer relationship rather than per tax year, employees with multiple qualifying payments from the same employment ending must aggregate them against the single £30,000 limit. Use the Redundancy Pay calculator to model your own termination payment components and tax position.