Answers · UK 2025/26
Is my redundancy payment tax free?
The first £30,000 of a genuine redundancy payment is tax free and NI free. Anything above £30,000 is taxed at your marginal rate (20%, 40% or 45%) and the employer pays 15% Class 1A NI on the excess. Pay in lieu of notice (PILON), unused holiday pay and bonuses are fully taxable.
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The £30,000 statutory exemption has been frozen for decades and covers ex-gratia, statutory and contractual redundancy combined — not per payment. Worked example: an employee receives £42,000 redundancy plus £6,000 PILON plus £1,500 holiday pay. The £30,000 exemption shelters the first £30,000 of the redundancy element. The remaining £12,000 of redundancy is taxed at marginal rate (40% = £4,800 if higher-rate) and the employer pays 15% Class 1A NI (£1,800). The £6,000 PILON and £1,500 holiday pay run through PAYE normally with Income Tax and 8%/2% NI. Tax-efficient planning: ask your employer to pay all or part of the over-£30,000 amount into a registered pension scheme via an employer contribution — this avoids both Income Tax and NI and uses pension annual allowance (£60,000 plus carry-forward). Statutory redundancy pay (capped at £21,000 in 2025 using £719 weekly cap × 30 weeks max for over-41s) is always within the £30,000 limit. Foreign-service exemptions ended in 2018. The exemption also covers payments for injury or disability that ends employment. Always check the settlement-agreement breakdown carefully before signing.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.