Using Redundancy Pay to Start a Business: The Tax Mechanics (2026/27)
How the tax picture works in your first year when redundancy pay funds a move into self-employment: the tax-free redundancy limit, mixing PAYE and self-employed income, and payments on account.
Redundancy Pay Itself Isn't Affected by What You Do Next
It's worth separating two things that often get muddled: how your redundancy payment is taxed, and what you choose to do with the money afterwards. The tax treatment of a genuine redundancy payment doesn't change because you plan to use it to fund a new business — the standard rule applies regardless, with the first £30,000 tax-free and any excess taxed as income (though not subject to National Insurance) in the tax year it's paid.
Redundancy Pay Calculator
Calculate your statutory redundancy pay based on age, length of service and weekly pay.
Open Redundancy Pay calculatorStarting to Trade in the Same Tax Year
If you start self-employed trading in the same tax year as your redundancy, that year's tax picture involves several strands: any taxable redundancy pay above £30,000, PAYE earnings from your former employer for the part of the year you were employed, and your new self-employed profit from the point trading began. The £1,000 trading allowance still applies to the self-employed income specifically — the first £1,000 of trading income in the tax year is tax-free, regardless of what other income you also received.
Self-Employed Tax Calculator
Calculate income tax, Class 2 and Class 4 National Insurance for self-employed and sole traders for 2025/26.
Open Self-Employed Tax calculatorRegistering Promptly
Once your self-employed income for the tax year is expected to exceed the £1,000 trading allowance, you generally need to register with HMRC as self-employed, with a deadline of 5 October following the end of the tax year in which you started trading. Registering promptly, rather than waiting to see how the business develops, avoids a scramble close to the deadline and gives you a clearer run-up to your first Self Assessment filing.
Payments on Account: Usually Not an Immediate First-Year Issue
Payments on account — advance instalments towards the following year's tax bill — are generally triggered once your Self Assessment tax bill exceeds a set threshold and less than 80% of your total tax was collected at source. Because a first, partial year of self-employment often produces a smaller tax bill than a full year, payments on account may not bite immediately, but it's worth understanding they become more likely once your trading income (and tax bill) grows in year two.
Sole Trader Take-Home Pay Calculator 2026/27
Calculate your net take-home pay as a UK sole trader after Income Tax and Class 4 National Insurance. Compare with PAYE employment.
Open Sole Trader Pay calculatorChecklist
- Confirm which part of your redundancy payment is tax-free (up to £30,000) and which is taxable
- Register as self-employed once trading income is likely to exceed the £1,000 trading allowance
- Set aside tax from self-employed earnings separately from your redundancy money
- Check whether payments on account will apply once your Self Assessment bill is calculated
This article is general information, not financial or tax advice. Figures use 2026/27 UK tax, National Insurance and redundancy pay rules.
Frequently asked questions
Is redundancy pay used to start a business taxed differently to redundancy pay spent elsewhere?
No — how you use your redundancy pay afterwards has no bearing on how it's taxed. The standard rule applies regardless: the first £30,000 of a genuine redundancy payment is tax-free, with any amount above that taxed as income in the tax year it's received.
Can I claim the £1,000 trading allowance in the same tax year I was made redundant?
Yes — the trading allowance lets you earn up to £1,000 of self-employed income tax-free in a tax year, regardless of what other income (including redundancy pay or PAYE earnings from earlier in the year) you also received in that same tax year.
Do I need to register as self-employed straight away if I start trading right after redundancy?
You generally need to register with HMRC once your self-employment income exceeds the £1,000 trading allowance, and there's a deadline for registering by 5 October following the end of the tax year in which you started trading, so it's worth registering promptly rather than waiting.
How does mixing PAYE income and self-employed profit in the same tax year affect my tax bill?
Both are combined on a single Self Assessment return: your PAYE income (with tax already deducted, including any tax on redundancy pay above £30,000) and your self-employed profit are added together to determine your total Income Tax and Class 2/4 National Insurance position for the year.
Will I need to make payments on account in my first year of self-employment?
Possibly, in your second year of trading rather than necessarily the first — payments on account are advance payments towards the following year's tax bill, generally required once your Self Assessment tax bill exceeds a threshold and less than 80% of your tax was collected at source, so a first part-year of trading may not trigger them immediately.
Try the calculators
Redundancy Pay Calculator
Calculate your statutory redundancy pay based on age, length of service and weekly pay.
Self-Employed Tax Calculator
Calculate income tax, Class 2 and Class 4 National Insurance for self-employed and sole traders for 2025/26.
Sole Trader Take-Home Pay Calculator 2026/27
Calculate your net take-home pay as a UK sole trader after Income Tax and Class 4 National Insurance. Compare with PAYE employment.
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