How much redundancy pay is tax-free in the UK?

Full answer

In the UK, the first £30,000 of a genuine redundancy payment is exempt from both Income Tax and National Insurance. This exemption covers statutory redundancy pay, enhanced redundancy pay and certain ex gratia compensation for loss of office. It applies per redundancy event rather than per tax year. Amounts above £30,000 are taxed as employment income at your marginal rate (20%, 40% or 45%), and employee Class 1 National Insurance is also charged on the excess above £30,000. Crucially, not everything in a settlement counts toward the tax-free band. Pay in Lieu of Notice (PILON) is always fully taxable as earnings — under the rules, the Post-Employment Notice Pay element is calculated and taxed in full regardless of whether your contract mentions PILON. Unpaid holiday pay, bonuses and commission are also taxable earnings and do not benefit from the £30,000 exemption. Worked example: an employee receives £25,000 statutory and enhanced redundancy plus £10,000 PILON. The £25,000 redundancy is within the £30,000 exemption and is tax-free; the £10,000 PILON is fully taxable. If the redundancy element were £45,000 instead, the first £30,000 is tax-free and £15,000 is taxed at the marginal rate (plus NI). A tax-efficient option some employers allow is paying part of an above-£30,000 award directly into your pension, which can avoid immediate tax. Statutory redundancy entitlement itself depends on age, weekly pay (capped) and years of service. Use the Take-Home Pay calculator to model the taxable portion.

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