Redundancy Pay Tax-Free Limit 2026/27: How Much of Your Payout Is Actually Tax-Free

What Actually Falls Within the £30,000 Tax-Free Limit

Redundancy packages are often made up of several different components, and only some of them qualify for the £30,000 tax-free treatment:

This distinction matters because a headline "£40,000 redundancy package" might only have, say, £28,000 that's genuinely eligible for the tax-free treatment, with the rest being taxable salary-type payments that were always going to be taxed regardless of the £30,000 limit.

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Worked Example

Tom is made redundant after 12 years. His total package is £42,000, broken down as:

Of the £42,000, only £25,000 (£9,000 + £16,000) falls within the £30,000 tax-free redundancy allowance — and since that's under £30,000, all of it is tax-free. The remaining £17,000 (PILON, holiday pay, bonus) is taxed as normal employment income through PAYE, alongside Tom's final salary for the tax year.

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What Happens Above £30,000

If the qualifying ex gratia/redundancy element itself exceeds £30,000, the excess is added to your other taxable income for the year and taxed at your marginal rate for 2026/27:

Because the excess is added to your income in the tax year it's paid, a large redundancy payment in a year where you've already earned a full salary can push a significant chunk of it into the 40% or even 45% band, even if your normal annual income wouldn't reach those bands. Some employees negotiate timing (e.g., receiving part of the payment in a different tax year, if the employer agrees) to manage this, though this needs careful handling and isn't always possible.

Employer's Class 1A National Insurance (currently 15% for 2026/27) applies to the excess above £30,000, though this is paid by the employer, not deducted from your payment.

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Statutory Redundancy Pay: How It's Calculated

Statutory redundancy pay (which sits inside, not on top of, the £30,000 allowance) is based on age, length of continuous service (capped at 20 years), and weekly pay (capped by a government-set maximum, updated annually):

Weekly pay used in the calculation is capped at a government-set maximum figure that's uprated each year — check the current cap when calculating, as it directly limits the maximum statutory redundancy payout regardless of actual salary.

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Redundancy Pay and Means-Tested Benefits

This is a frequently overlooked interaction: while a redundancy payment (up to £30,000) is tax-free for income tax purposes, it still counts as capital for means-tested benefits like Universal Credit.

A £25,000 tax-free redundancy payment could therefore still remove Universal Credit eligibility entirely while that money sits in savings, even though no income tax was due on it — worth factoring in when budgeting for a period out of work after redundancy.

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Practical Steps After Redundancy

1. Get an itemised breakdown of your redundancy package from your employer — distinguishing statutory redundancy, ex gratia payment, PILON, holiday pay and bonus separately, since each is taxed differently.
2. Check your P45/final payslip matches the tax treatment described above — errors in applying the £30,000 exemption do happen.
3. If your qualifying redundancy element is close to or over £30,000, consider getting professional advice on timing or structuring, particularly if you have other income in the same tax year.
4. If claiming Universal Credit or other means-tested benefits, budget for the capital limit rules separately from the tax treatment — a tax-free payment can still remove benefit entitlement.