Redundancy Pay Split Across Tax Years: Does It Reduce Your Tax Bill in 2026/27?
Some employers offer to split a large redundancy payment across two tax years or two instalments. Whether this genuinely reduces the tax owed, and the rules that determine when it works, in 2026/27.
Quick answer
Splitting a large redundancy payment across two tax years can genuinely reduce the tax bill on the portion above the £30,000 exemption — but only if it's a real, contractually binding deferral into a later tax year, and only if your income in that later year is genuinely lower. Simply paying in two instalments within the same tax year doesn't help at all.
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Redundancy pay calculatorWhy timing matters
Income Tax bands apply per tax year — the first £37,700 of taxable income at 20%, the next chunk to £125,140 at 40%, and above that at 45%. Receiving £60,000 of taxable redundancy pay (above the £30,000 exempt amount) all in one tax year, on top of several months of ordinary salary already earned that year, can push a large slice of it into the higher or even additional rate. Spreading that same £60,000 across two tax years — say, £30,000 taxable in each — can keep more of it within the basic-rate band in each year, if your other income in both years is otherwise modest.
It has to be a genuine deferral
HMRC taxes redundancy and termination payments based on when they're actually paid or contractually due, whichever is earlier — not on how an employer chooses to label the payment for convenience. For the tax-year-split strategy to work, the settlement agreement needs to genuinely defer part of the payment's contractual due date into the next tax year, properly documented, rather than simply issuing two payslips a few weeks apart within the same tax year.
uk-redundancy-pay-tax-complete-guide-2026-27The £30,000 exemption doesn't multiply
It's a common misunderstanding that splitting the payment creates two separate £30,000 tax-free amounts — it doesn't. The £30,000 exemption applies once, to the qualifying termination payment as a whole. Splitting only affects how the taxable excess above £30,000 is allocated between tax years, not the size of the tax-free portion itself.
When it isn't worth doing
If you expect to find new employment quickly, or already have other substantial income in the second tax year, deferring part of the redundancy payment may provide little or no tax saving — and creates cash-flow complexity for no real benefit. This strategy works best when there's a genuine, likely gap in earnings between the two tax years.
Bottom line
A tax-year split on a large redundancy payment can be a legitimate and valuable strategy, but only with a properly documented contractual deferral and a realistic expectation of lower income in the second tax year — get this reviewed as part of negotiating the settlement agreement itself, not after the fact.
Sources
- GOV.UK: Tax on termination payments
- GOV.UK: Income Tax rates and Personal Allowances
Frequently asked questions
Does splitting a redundancy payment across two tax years reduce the tax owed?
It can, but only if the payment is genuinely and contractually deferred to a later tax year, not simply paid in two instalments within the same tax year — HMRC taxes redundancy pay based on when it's actually received (or contractually due, if earlier), not when it's nominally 'allocated' by the employer for administrative convenience.
Why would splitting across tax years reduce tax?
Because the £30,000 tax-free redundancy exemption and the standard Income Tax bands apply per tax year, spreading the taxable portion (above £30,000) of a large redundancy payment across two tax years, rather than receiving it all in one, can keep more of it in a lower tax band each year rather than pushing a large lump into the higher or additional rate in a single year.
Can my employer just agree informally to pay half now and half next tax year?
It needs to be a genuine, binding contractual arrangement to defer part of the payment to a later date, properly documented in the settlement agreement — an informal understanding without contractual effect risks HMRC treating the full amount as taxable when it was originally due, regardless of when cash actually changed hands.
Does the £30,000 tax-free exemption apply once, or once per tax year if split?
The £30,000 exemption applies once, to the qualifying termination payment as a whole, not per tax year — splitting the payment across tax years doesn't create two separate £30,000 exemptions, only the potential to spread the taxable portion above £30,000 across different tax bands in different years.
Is this arrangement always beneficial?
Not necessarily — it depends on your income in each of the two tax years. If you expect similar or higher income in the second year (for example, if you find a new job quickly), spreading the payment may provide little or no tax benefit compared with taking it all at once while between jobs.
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