Is the first £30,000 of redundancy pay always tax-free?

Full answer

The £30,000 tax-free threshold for redundancy and termination payments is one of the most valuable, but also most misunderstood, tax reliefs relating to leaving a job, because not everything paid on leaving actually qualifies for it. **What counts as a genuine termination payment** The £30,000 exemption applies to genuinely non-contractual compensation for loss of office or employment -- this includes statutory redundancy pay, and any additional ex-gratia (discretionary, non-contractual) payment an employer chooses to make on top, recognising the compensation nature of the payment for losing your job. **What does NOT qualify for the exemption** Amounts that represent payment you were CONTRACTUALLY entitled to anyway are taxed as normal earnings (subject to full Income Tax and National Insurance, including employer NI), regardless of the £30,000 threshold -- this includes unpaid salary up to your termination date, any contractual bonus or commission owed, accrued but untaken holiday pay, and Payment In Lieu of Notice (PILON) where your contract includes a PILON clause (or where PILON is customary practice) -- these amounts are added to your normal taxable pay entirely separately from the £30,000 exemption calculation. **How PILON complicates the calculation** Where an employer terminates employment without requiring the employee to work their notice, specific 'post-employment notice pay' (PENP) rules determine how much of any payment made in place of notice must be treated as fully taxable earnings (rather than covered by the £30,000 exemption), based on a statutory formula considering your normal pay and remaining notice period -- this can mean part of what looks like a single termination payment is actually split between fully taxable PENP and £30,000-exempt genuine compensation. **National Insurance treatment** Even the genuinely exempt compensation portion up to £30,000, while free of Income Tax, is not entirely free of National Insurance in every case -- specifically, EMPLOYER (not employee) Class 1A National Insurance applies to the portion of a termination payment ABOVE £30,000, whereas the qualifying compensation UP TO £30,000 avoids both employee and employer NI. **Worked example** Someone is made redundant and receives £5,000 in accrued unpaid holiday pay, a £10,000 statutory redundancy payment, and a further £15,000 ex-gratia payment from their employer. The £5,000 holiday pay is fully taxable as normal earnings, unrelated to the £30,000 exemption. The £10,000 statutory redundancy pay and £15,000 ex-gratia payment together total £25,000, which is genuine compensation covered by the £30,000 exemption and paid free of Income Tax (and employee NI) since it falls under that threshold. **Amounts above £30,000** Any genuine compensation ABOVE £30,000 is taxed as income at your marginal rate (added to your other income for the tax year, which can push some of it into a higher band), and also attracts employer Class 1A National Insurance, though still not employee NI. **Practical tip** Ask your employer (or check your settlement agreement, if one is used) for a clear breakdown of exactly which elements of your termination payment are treated as contractual/taxable versus genuinely exempt compensation, since the £30,000 exemption often applies to a smaller portion of the total payment than employees initially assume, particularly once PILON and accrued pay are properly accounted for.

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