Redundancy Pay Over GBP 30,000: How It Is Taxed in 2026/27
How redundancy pay over GBP 30,000 is taxed in the UK for 2026/27: the tax-free band, what counts as taxable, NI, PILON rules and how to cut your bill.
Quick answer
If your redundancy package exceeds GBP 30,000, only the genuine compensation above GBP 30,000 is taxable. That excess is added to your other income and taxed at your marginal rate -- 20%, 40% or 45% in 2026/27 (England, Wales and Northern Ireland). You pay no employee National Insurance on it. Salary, holiday pay, bonuses and PILON are always taxed in full and never count towards the GBP 30,000 exemption.
What actually counts towards the GBP 30,000 exemption
The GBP 30,000 tax-free figure is one of the most misunderstood numbers in UK pay. It does not mean the first GBP 30,000 of everything your employer hands you on the way out is tax-free. It applies only to a "termination payment" -- a genuine, ex-gratia payment made because your job is ending, where you were not contractually entitled to it.
Typical amounts that DO fall within the exemption:
- Statutory redundancy pay.
- Enhanced or contractual redundancy pay (the extra your employer pays on top of statutory).
- Genuine ex-gratia or "goodwill" lump sums tied to the loss of the job.
Amounts that do NOT benefit from the exemption, because they are normal earnings:
- Salary up to your leaving date.
- Accrued but untaken holiday pay.
- Bonuses and commission you had earned.
- Pay in lieu of notice (PILON) -- see below.
How the slice over GBP 30,000 is taxed in 2026/27
The taxable excess is stacked on top of your other income for the year. So the rate you pay depends on where that excess falls once your salary, the PILON, holiday pay and any other income are taken into account.
For England, Wales and Northern Ireland in 2026/27:
| Band | Taxable income (gross) | Income Tax rate |
|---|---|---|
| Personal Allowance | Up to GBP 12,570 | 0% |
| Basic rate | GBP 12,571 to GBP 50,270 | 20% |
| Higher rate | GBP 50,271 to GBP 125,140 | 40% |
| Additional rate | Above GBP 125,140 | 45% |
The Personal Allowance is GBP 12,570 and is frozen to April 2028. Crucially, it is tapered away by GBP 1 for every GBP 2 of adjusted net income above GBP 100,000, vanishing completely at GBP 125,140. That taper creates an effective 60% marginal rate on income between GBP 100,000 and GBP 125,140 -- a real trap for anyone with a large package on top of a six-figure salary.
If you live in Scotland, your redundancy excess is taxed using the Scottish bands instead: Starter 19%, Basic 20%, Intermediate 21%, Higher 42%, Advanced 45% and Top 48%. The GBP 30,000 exemption itself is UK-wide and works the same way.
To see exactly where your excess lands, model your full year's income first.
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There is no employee National Insurance on the genuine redundancy compensation, including the part above GBP 30,000. This is one reason redundancy pay is treated more kindly than ordinary earnings.
Be careful, though. You DO pay Class 1 employee NI on the contractual elements -- salary, holiday pay, bonuses and PILON -- at 8% on earnings between GBP 12,570 and GBP 50,270 and 2% above GBP 50,270 for 2026/27.
Employers face their own bill: employer NI at 15% can apply to the taxable redundancy excess over GBP 30,000. That is the employer's cost, not deducted from you, but it sometimes influences how an employer structures or negotiates a package.
PILON: the rule that catches people out
Pay in lieu of notice is the single biggest reason people are surprised by a tax bill. Since April 2018, all PILON is treated as ordinary earnings -- fully subject to Income Tax and Class 1 National Insurance -- and gets none of the GBP 30,000 exemption.
HMRC uses a formula called post-employment notice pay (PENP) to work out the value of the notice you did not work, and that amount is taxed as earnings even if your contract never mentioned a PILON clause. In practice this means an employer cannot dress up unworked notice as tax-free "compensation".
A worked illustration
Suppose your annual salary is GBP 48,000, you receive GBP 12,000 of salary and holiday pay up to your leaving date earlier in the year, GBP 9,000 of PILON, and a genuine redundancy package of GBP 50,000.
- The GBP 50,000 redundancy element: first GBP 30,000 tax-free, leaving GBP 20,000 taxable.
- The PILON of GBP 9,000: fully taxable and NI-able as earnings.
- The salary and holiday pay: taxed and NI-able as normal.
The GBP 20,000 taxable excess is stacked on top of everything else. Because the combined income comfortably exceeds GBP 50,270, much of that GBP 20,000 is likely to be taxed at 40% rather than 20%. The exact split depends on your total income for the year, which is why running the numbers matters before you accept or sign anything.
Two people each get a GBP 50,000 redundancy package. Person A has GBP 20,000 of other income that year, so most of their GBP 20,000 excess is taxed at 20%. Person B already earns GBP 70,000, so their entire GBP 20,000 excess is taxed at 40% -- twice the tax on the same redundancy figure. The package is identical; the tax is completely different.
Five legitimate ways to cut the tax
You cannot make the taxable excess disappear, but you can often reduce the rate it suffers.
1. Pay the excess into a pension
Asking your employer to pay some or all of the taxable excess directly into a registered pension scheme is usually the most powerful move. It can take income out of the 40% or 45% band -- or out of the 60% Personal Allowance taper between GBP 100,000 and GBP 125,140 -- entirely. The Annual Allowance for 2026/27 is GBP 60,000 (reduced to the GBP 10,000 Money Purchase Annual Allowance if you have already flexibly accessed a pension). Get regulated advice, because the money is then locked away until pension age.
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Open Pension calculator2. Spread the payment across two tax years
If part of the payment can fall into the next tax year, each year gets its own Personal Allowance and band limits, which can keep more of the money at lower rates. Employers do not always agree, and the GBP 30,000 exemption remains a single combined limit, not GBP 30,000 per year.
3. Use the Personal Allowance restoration trick
If your total income crosses GBP 100,000, a pension contribution that brings adjusted net income back below GBP 100,000 not only saves higher-rate tax but also restores Personal Allowance -- delivering that effective 60% relief on the slice in the taper band.
4. Check your tax code and reclaim overpayments
Large one-off payments are often taxed using emergency or estimated codes, which over-deduct. After the year ends, compare what was taken with your real position and reclaim through HMRC or self assessment if needed.
5. Make the most of allowances for what you do with the cash
Once the redundancy money lands, your ISA allowance (GBP 20,000 for 2026/27) shelters savings and investment returns from tax. The savings starting rate, the GBP 500 dividend allowance and the GBP 3,000 Capital Gains annual exempt amount all matter if you invest a lump sum.
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Open Take-Home Pay calculatorCommon mistakes to avoid
- Assuming the whole package is tax-free up to GBP 30,000 -- it is only the genuine compensation element.
- Forgetting that PILON and holiday pay are fully taxed and NI-able.
- Ignoring the higher-rate or 60% trap when the excess stacks on your salary.
- Leaving an emergency tax code unchecked and never reclaiming the overpayment.
- Locking money into a pension without advice or without checking your Annual Allowance.
The bottom line
For 2026/27, redundancy pay over GBP 30,000 is taxed at your marginal Income Tax rate on the excess only, with no employee National Insurance on the genuine compensation. The real planning happens around three things: separating contractual earnings from genuine compensation, watching which tax band the excess lands in, and using pension contributions to protect both your higher-rate income and your Personal Allowance. Model your full-year position before you sign a settlement -- the difference between 20%, 40% and an effective 60% can be thousands of pounds.
This article is general information, not personal tax advice. For a large or complex package, speak to a regulated adviser or accountant.
Frequently asked questions
Is the first GBP 30,000 of redundancy pay always tax-free?
The GBP 30,000 exemption applies only to genuine ex-gratia termination payments, such as statutory and enhanced redundancy pay for losing your job. It does not cover contractual pay you were owed, such as salary, holiday pay, bonuses, or pay in lieu of notice (PILON). Only the genuine compensation element above GBP 30,000 is taxable. The exemption is a single GBP 30,000 limit across all payments connected with the same termination, not GBP 30,000 per payment.
How is redundancy pay over GBP 30,000 taxed?
The slice above GBP 30,000 is added to your other taxable income for the year and taxed at your marginal Income Tax rate. For 2026/27 in England, Wales and Northern Ireland that means 20% if it falls in the basic-rate band, 40% in the higher-rate band, and 45% above GBP 125,140. Scotland uses its own bands. A large payment can push you into a higher band, so timing and pension contributions matter.
Do I pay National Insurance on redundancy pay?
You do not pay employee National Insurance on the genuine redundancy compensation element, even on the part above GBP 30,000. However, you do pay Class 1 NI in the normal way on contractual amounts such as salary, holiday pay, bonuses and pay in lieu of notice. Employer NI at 15% can apply to the taxable excess over GBP 30,000, but that is the employer's cost, not yours.
Is pay in lieu of notice (PILON) taxed?
Yes. Since 2018 all PILON is treated as earnings, so it is fully subject to Income Tax and Class 1 National Insurance and does not benefit from the GBP 30,000 exemption. This is calculated through a formula called post-employment notice pay (PENP). Even if your contract has no PILON clause, HMRC treats the value of your unworked notice period as taxable earnings rather than tax-free compensation.
Can I avoid tax by paying redundancy money into a pension?
You can reduce the tax on the taxable excess by asking your employer to pay some or all of it into a registered pension scheme before it is paid to you, subject to your Annual Allowance of GBP 60,000 for 2026/27. A pension contribution can also restore Personal Allowance lost above GBP 100,000 and bring you back below a tax band. Take regulated advice first, as your money is then locked away until pension age.
Will a big redundancy payment affect my Personal Allowance?
It can. The Personal Allowance of GBP 12,570 is reduced by GBP 1 for every GBP 2 of adjusted net income above GBP 100,000, and disappears entirely at GBP 125,140. This creates an effective 60% tax rate on income in that band. If your salary plus the taxable part of redundancy crosses GBP 100,000, a pension contribution to bring adjusted net income back down can be very tax-efficient.
Does redundancy pay count for student loan repayments?
Contractual earnings such as salary, bonus and PILON count towards student loan deductions in the usual way. The genuine redundancy compensation above GBP 30,000 is taxable income but is not classed as earnings for student loan purposes, so it does not trigger student loan deductions. Thresholds for 2026/27 are GBP 26,900 for Plan 1, GBP 29,385 for Plan 2, GBP 25,000 for Plan 5 and GBP 21,000 for Postgraduate Loans.
What if my redundancy payment is split across two tax years?
Spreading a payment across two tax years can keep more of it within lower tax bands, because each year has its own Personal Allowance and band limits. Employers do not always agree to this and the GBP 30,000 exemption is still a single combined limit, not GBP 30,000 per year. If part is paid after your P45, the employer should use the correct tax code, and you may need to reclaim or settle tax through self assessment.
How do I check whether too much tax was deducted?
Employers often apply emergency or estimated tax codes to large one-off payments, which can over-deduct. After the tax year ends, check your figures against your actual total income. You may be due a refund if the deduction assumed a full year at a higher rate. Use a calculator to model your real marginal position, then contact HMRC or complete a self assessment return if an adjustment is needed.
Is statutory redundancy pay taxable at all?
Statutory redundancy pay is part of the genuine compensation that counts towards the GBP 30,000 tax-free limit, so on its own it is almost always tax-free because the statutory amounts are well below GBP 30,000. It only becomes relevant for tax when combined with enhanced redundancy, ex-gratia sums or other termination payments that together exceed GBP 30,000. National Insurance is not due on the statutory element.
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