Redundancy Pay Tax-Free Limit 2026/27: How Much of Your Payout Is Actually Tax-Free
The first £30,000 of most redundancy payments is tax-free, but not every part of a redundancy package qualifies — and anything above £30,000 is taxed at your marginal rate. Here's how to work out what you'll actually receive.
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:
| Component | Tax-free up to £30,000? |
|---|---|
| Statutory redundancy pay | Yes |
| Additional ex gratia/discretionary redundancy payment | Yes |
| Unpaid salary owed | No — taxed as normal earnings |
| Accrued but untaken holiday pay | No — taxed as normal earnings |
| Payment in Lieu of Notice (PILON) | No — taxed as normal earnings since April 2018 |
| Contractual bonus/commission | No — taxed as normal earnings |
| Outplacement/counselling support (employer-arranged) | Usually exempt separately, not counted against the £30,000 |
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.
Worked Example
Tom is made redundant after 12 years. His total package is £42,000, broken down as:
| Component | Amount | Tax treatment |
|---|---|---|
| Statutory redundancy pay | £9,000 | Within £30,000 tax-free band |
| Ex gratia payment | £16,000 | Within £30,000 tax-free band |
| Payment in lieu of notice | £8,000 | Taxed as normal earnings |
| Accrued holiday pay | £4,000 | Taxed as normal earnings |
| Unused annual bonus (pro-rated, contractual) | £5,000 | Taxed as normal earnings |
| Total package | £42,000 | — |
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.
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:
| Income band | Rate |
|---|---|
| Up to £12,570 (Personal Allowance) | 0% |
| £12,570 – £50,270 | 20% |
| £50,270 – £125,140 | 40% |
| Above £125,140 | 45% |
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.
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):
| Age band | Entitlement per full year of service |
|---|---|
| Under 22 | 0.5 week's pay |
| 22 to 40 | 1 week's pay |
| 41 and over | 1.5 weeks' pay |
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.
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.
| Capital held | Universal Credit effect |
|---|---|
| Under £6,000 | No effect on entitlement |
| £6,000 – £16,000 | Entitlement reduced on a sliding scale |
| Over £16,000 | No Universal Credit entitlement while capital remains above this level |
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.
Practical Steps After Redundancy
- 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.
- Check your P45/final payslip matches the tax treatment described above — errors in applying the £30,000 exemption do happen.
- 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.
- 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.
Frequently asked questions
Related reading
Umbrella Company Deductions UK 2026: What You Should and Should Not Pay
Umbrella companies deduct PAYE, NI, and a margin fee before paying contractors. But some umbrella schemes make deductions that are unlawful. Here is what is legitimate, what is not, and how HMRC is cracking down in 2026.
£45,000 Redundancy: Tax in Scotland vs England in 2026/27
The first £30,000 of genuine redundancy pay is tax-free everywhere in the UK. On a £45,000 payout, the £15,000 excess is taxed as ordinary income at your marginal rate — and that rate depends on where you live. A worker with £20,000 other income pays £895.77 more tax in Scotland; a higher earner pays £527.10 more.
Carer's Leave vs Carer's Allowance: How the Two Interact in 2026/27
Statutory Carer's Leave gives eligible employees up to one week of unpaid leave a year — a separate right from the means-tested Carer's Allowance benefit. How they work together, and what neither covers.