Redundancy Pay vs Notice Pay: The Tax Difference in 2026/27
The £30,000 redundancy exemption and the PILON tax rules explained for 2026/27 -- with worked examples showing how to structure a settlement to minimise your tax bill.
Being made redundant is stressful enough without having to navigate complex tax rules at the same time. The interaction between redundancy pay, notice pay, and the £30,000 tax exemption is genuinely confusing -- and getting it wrong can cost you thousands of pounds. This guide explains exactly how each element is taxed in 2026/27, with worked examples to show how a well-structured settlement compares to a poorly structured one.
The Two Categories: Redundancy vs Notice Pay
The most important thing to understand is that redundancy pay and notice pay are taxed entirely differently:
| Payment type | Taxable? | Subject to NI? |
|---|---|---|
| Statutory redundancy pay (up to £30,000 combined) | No | No |
| Enhanced contractual redundancy (up to £30,000 combined) | No | No |
| Amount above £30,000 combined limit | Yes -- income tax only | No (employee NI) |
| PILON (Payment In Lieu Of Notice) | Yes -- fully | Yes -- income tax and NI |
| Garden leave pay | Yes -- fully | Yes -- income tax and NI |
| Unpaid holiday at termination | Yes -- fully | Yes -- income tax and NI |
| Contractual bonus at termination | Yes -- fully | Yes -- income tax and NI |
The £30,000 exemption applies only to qualifying redundancy and compensation payments, and never to notice pay since April 2018.
The £30,000 Tax-Free Exemption
The first £30,000 of combined qualifying termination payments is completely exempt from income tax and National Insurance. This has been the rule since 1988 and the limit has never been increased for inflation.
What qualifies for the £30,000 exemption:
- Statutory redundancy pay (calculated on age, service and weekly pay)
- Enhanced contractual redundancy pay agreed in your employment contract
- Certain ex-gratia payments made in connection with termination of employment
- Compensation for loss of employment (in some circumstances)
- Payments for injury to feelings arising from personal injury (not discrimination)
What does NOT qualify:
- PILON (notice pay) -- always taxable regardless of amount
- Garden leave -- always taxable
- Contractual bonus payments
- Unpaid wages or holiday pay
- Any payment the PENP formula allocates to notice
The PENP Formula: Calculating Taxable Notice Pay
Since April 2018, HMRC uses the Post-Employment Notice Pay (PENP) formula to calculate how much of any termination payment is attributable to unworked notice and therefore taxable:
PENP = (BP ÷ D) x T
Where:
- BP = Basic pay in the last pay period before notice began
- D = Number of days in that pay period
- T = Number of calendar days of unworked notice
The PENP amount is always subject to income tax and NI, regardless of whether a PILON clause exists in the contract or not. The PENP is subtracted from any lump sum payment, and only the remainder can qualify for the £30,000 exemption.
Calculate your take-home pay after tax on different payment structures
Worked Examples
Example A: Simple Redundancy Plus PILON
Scenario: Employee with 8 years service, aged 40, salary £45,000. Statutory notice period 8 weeks. Employer pays 4 months of enhanced redundancy (£15,000) plus 8 weeks PILON (£6,923).
| Payment | Amount | Tax treatment |
|---|---|---|
| Enhanced redundancy | £15,000 | Tax-free (below £30,000 limit) |
| PILON (8 weeks) | £6,923 | Fully taxable -- income tax and NI |
As a basic-rate taxpayer, tax on the PILON: £6,923 x 20% = £1,385. NI at 8%: £554. Net from PILON = £4,984. The employee effectively receives £15,000 + £4,984 = £19,984 net.
Example B: Large Settlement Agreement -- Structuring Matters
Scenario: Same employee. Total settlement £40,000. Two possible structures:
Structure 1 -- badly structured: £40,000 all described as enhanced redundancy
The PENP formula allocates the 8-week notice period to the payment. PENP = (£45,000 ÷ 52) x (56 days / 7 days per week) = £865.38 x 8 = £6,923. This £6,923 is taxable as PILON. The remaining £33,077 qualifies for the £30,000 exemption -- but £3,077 is still taxable at 20% = £615.
Total tax: £6,923 x 20% (income tax) + £6,923 x 8% (NI) + £3,077 x 20% (income tax on excess over £30,000) = £1,385 + £554 + £615 = £2,554 tax.
Structure 2 -- better: £33,077 redundancy + £6,923 paid as PILON with correct labels
The tax outcome is the same because HMRC requires the PENP calculation regardless of labelling. What matters is the actual structure of the agreement.
Better: Negotiate a larger redundancy element and shorter notice in lieu
If the employer agrees to pay only 4 weeks PILON (£3,462) and £36,538 as redundancy/compensation: PENP is now £3,462 (taxable). Redundancy element is £36,538 -- first £30,000 exempt, £6,538 taxable at 20% = £1,308.
Total tax: £3,462 x 20% + £3,462 x 8% + £6,538 x 20% = £692 + £277 + £1,308 = £2,277 tax -- slightly better.
The more effective approach is reducing the total notice pay element as much as possible and maximising the genuine redundancy compensation.
Garden Leave: No Tax Advantage
Garden leave means you remain employed, receive your full salary, but are asked to stay at home rather than attend work. This is taxed exactly like working:
- Full income tax and National Insurance apply to every payment
- No access to the £30,000 exemption
- No planning opportunity during garden leave
The only potential benefit of garden leave over PILON is that you continue accruing pension contributions and holiday pay during the period. But from a tax perspective, there is no difference.
The Year of Redundancy: Income Timing
If your total income in the year of redundancy -- including the taxable redundancy element -- pushes you into the higher-rate band, consider:
- Pension contributions: Contributing the taxable excess into a SIPP immediately claims higher-rate relief
- Timing termination: If the redundancy falls near the end of a tax year, could the payment be made early in the next year when your income might be lower?
- Salary sacrifice: Agreeing with the employer to take some elements as enhanced employer pension contributions rather than cash (always tax-free, exempt from NI for both employer and employee)
Settlement Agreements: Key Considerations
Settlement agreements (formerly called compromise agreements) require you to receive independent legal advice, which the employer typically pays for.
Elements that can qualify for the £30,000 exemption in a settlement agreement:
- Redundancy payment
- Compensation for loss of employment
- Some injury to feelings payments (where arising from genuine personal injury)
Elements that are always taxable:
- PILON (under the PENP formula)
- Outstanding wages, holiday pay, bonuses
- Restrictive covenant payments (post-employment restrictions)
A solicitor specialising in employment law can structure a settlement agreement to maximise the tax-free elements, which is worth the legal fee on any significant payment.
Frequently asked questions
Is redundancy pay taxable in the UK?
Statutory and contractual enhanced redundancy pay is tax-free up to a combined total of £30,000. Above £30,000, the excess is taxed as employment income at your marginal rate (20%, 40% or 45%) and also attracts National Insurance. The £30,000 exemption has not changed since 1988. Statutory redundancy pay itself is almost always well below this limit -- the maximum statutory amount (30 weeks x weekly cap) was £21,570 in 2025/26 and is expected to be uprated in April 2026.
Is notice pay (PILON) taxable?
Yes, fully. Payment In Lieu Of Notice (PILON) has been fully taxable as employment income since April 2018, regardless of whether your contract includes a PILON clause or not. Before 2018, PILON could sometimes fall within the £30,000 tax-free limit if not contractual. The Finance Act 2018 removed this flexibility completely. PILON is now always subject to income tax and National Insurance contributions -- there is no tax-free element. This applies to both contractual and non-contractual notice pay.
What is the PENP formula?
PENP stands for Post-Employment Notice Pay. It is a statutory formula used since April 2018 to calculate the taxable element of any termination payment that is attributable to unworked notice. The formula is: (BP / D) x T, where BP is the basic pay in the last pay period, D is the number of days in that pay period, and T is the number of days of notice not worked. The PENP is always taxable as employment income. Only the amount above the PENP can potentially qualify for the £30,000 exemption.
What is the tax treatment of garden leave?
Garden leave (where you are required to work your notice period but are told to stay at home) is taxed exactly the same as being in the office. You remain an employee during garden leave, so all payments received are fully taxable as employment income subject to PAYE and NI. There is no tax advantage to garden leave versus working the notice period. Only when an employee leaves without serving notice (and receives a redundancy payment) does the £30,000 exemption potentially apply.
Can I include injury to feelings payments in the £30,000 tax-free limit?
It depends on the nature of the claim. Compensation for injury to feelings arising from a personal injury (including psychiatric injury) is exempt from income tax and does not use up the £30,000 limit. However, injury to feelings payments for discrimination claims (under the Equality Act) are taxable. The distinction is technical and was clarified by the Upper Tribunal in 2020. In practice, settlement agreements often need to be carefully structured by a solicitor to maximise the tax-free elements available.
How does the £30,000 exemption apply to a settlement agreement?
The £30,000 exemption applies to the total of all qualifying termination payments -- statutory redundancy, enhanced contractual redundancy, and certain other compensation payments. PILON calculated under the PENP formula is always excluded from the exemption. The exemption applies to the first £30,000 of qualifying payments. Any excess above £30,000 is subject to income tax (but not employee NI, unusually -- though employer NI does apply above £30,000 from April 2020). Structuring a settlement correctly can save significant amounts.
What happens if my total redundancy and notice pay exceeds £30,000?
The first £30,000 of qualifying redundancy and compensation payments is completely tax-free. The excess above £30,000 is taxed at your marginal income tax rate -- 20%, 40%, or 45% depending on your total income that year. Unlike ordinary salary, the excess above £30,000 does not attract employee National Insurance contributions (though it does attract employer NI at 13.8% from April 2020). If your total termination package is large, it may be worth discussing the timing with your employer to split payments across two tax years.
How much tax would I pay on a £50,000 redundancy payment in 2026/27?
On a £50,000 redundancy payment (assuming this is genuine redundancy and no PILON), the first £30,000 is completely tax-free. The remaining £20,000 is taxable. If you are a basic-rate taxpayer (total income below £50,270), you pay 20% on £20,000 = £4,000. If you are a higher-rate taxpayer, you pay 40% on £20,000 = £8,000. No employee NI applies to the taxable redundancy element above £30,000. Employer NI at 13.8% on the £20,000 = £2,760 is borne by the employer.
Can pension contributions from redundancy reduce my tax bill?
Yes. If you make a personal pension contribution using some or all of your taxable redundancy payment, you receive tax relief on the contribution. For a higher-rate taxpayer receiving £20,000 above the £30,000 limit, contributing that £20,000 to a SIPP could save £8,000 in income tax (claiming 40% relief on a pension contribution). The contribution must be within your annual pension allowance (£60,000 in 2026/27) and any unused allowance carried forward. Pension carry-forward rules mean higher contributions may be possible.
What is the statutory weekly pay cap for redundancy calculations in 2026/27?
The weekly pay cap for statutory redundancy calculations was £719 for redundancies on or after 6 April 2025. HMRC typically uprates this cap each April. For redundancies taking effect on or after 6 April 2026, the updated 2026/27 cap applies -- check GOV.UK for the confirmed 2026/27 figure once officially announced. The formula remains the same: half a week per year under age 22, one week per year aged 22 to 40, and one and a half weeks per year aged 41 or over, capped at 20 years of service.
Try the calculators
Related reading
PILON Payment Tax Guide 2026/27: How Much You Keep
How is a payment in lieu of notice (PILON) taxed in 2026/27? Understand PENP, income tax, National Insurance and what lands in your pocket.
Tax on Redundancy Pay UK 2026: What's Actually Tax-Free?
The £30,000 tax-free exemption, how statutory redundancy is calculated, PILON rules since April 2018, the PENP formula, settlement agreements, and NI changes from April 2020. Worked examples and 8 FAQs.
Business Partnership Profit Split: How Tax Works for Two Self-Employed Partners in 2026/27
How HMRC taxes an ordinary business partnership in 2026/27: each partner is taxed individually on their share of profit, regardless of how the split is agreed. Worked example for a 60/40 split.