Is enhanced redundancy pay taxed differently from statutory redundancy pay?

Full answer

Enhanced redundancy pay -- an employer choosing to pay more than the legal statutory minimum -- follows exactly the same £30,000 tax-free threshold as statutory redundancy pay, which surprises some employees who assume the "enhanced" element must be taxed differently. **How the £30,000 exemption works** Genuine redundancy payments (termination payments made specifically because a role is redundant, not disguised salary or bonus) are tax-free up to a combined total of £30,000, covering both the statutory redundancy pay calculated by age, length of service and weekly pay, AND any additional enhanced or ex-gratia payment the employer chooses to add on top -- it is the TOTAL of both elements that is measured against the single £30,000 threshold, not each element separately. **What happens above £30,000** Any amount of the combined redundancy payment above £30,000 is subject to Income Tax at your marginal rate, added to your other income for the tax year in which it is paid. Unlike normal salary, National Insurance is NOT charged on the employee side even above £30,000, but the employer must pay employer National Insurance on the amount above £30,000. **Worked example** An employee is entitled to £8,000 statutory redundancy pay, and their employer chooses to add a further £35,000 enhanced (ex-gratia) payment on top, for a total redundancy payment of £43,000. The first £30,000 of this combined £43,000 is entirely tax-free (no Income Tax, no employee National Insurance) -- only the remaining £13,000 is subject to Income Tax at the employee's marginal rate (added to their income for that tax year), while the employee still pays no National Insurance on any part of the payment. **Payment in lieu of notice (PILON) is different** If part of the payment relates to notice pay the employee would have earned by working their notice period (payment in lieu of notice, or PILON), this element is fully taxable as normal earnings (subject to both Income Tax and National Insurance) and does NOT benefit from the £30,000 exemption, regardless of whether it is bundled together with the redundancy payment -- employers must separately identify and correctly tax the PILON element under specific post-employment notice pay (PENP) rules. **Timing across tax years** Because the £30,000 exemption and marginal tax rate depend on which tax year the payment falls in, the timing of a redundancy payment near the start or end of a tax year can affect the overall tax bill -- someone made redundant just before the tax year end with a large payment above £30,000 might prefer (if the employer can accommodate it) to have the taxable excess paid in the new tax year if this results in a lower marginal rate, though employers are not obliged to delay payment for this reason. **Effect on other income and thresholds** The taxable portion above £30,000 counts as income for that tax year, which can affect the Personal Allowance taper (if it pushes adjusted net income above £100,000), the High Income Child Benefit Charge threshold, and pension annual allowance tapering for high earners -- a large enhanced redundancy payment can unexpectedly trigger these secondary effects even if the underlying salary was previously well below the relevant thresholds. **Practical tip** Ask your employer for a clear breakdown separating the tax-free redundancy element, any taxable excess above £30,000, and any separately-taxed PILON, so you can check the tax deducted is correct and plan for any additional tax that might be due via Self Assessment if your employer's payroll withholding does not fully match your actual marginal rate for the year.

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