Tax on Redundancy Pay Over £30,000 UK 2026/27

Quick answer

When you are made redundant, the first £30,000 of a genuine redundancy payment is tax-free — and free of National Insurance. It is one of the most generous exemptions in UK tax. But the part of your package above £30,000 is taxed as ordinary income at your marginal rate in the year you receive it.

The two things that catch people out are: first, that not everything in a redundancy package counts toward the £30,000 — pay in lieu of notice, holiday pay and bonuses are fully taxable from the first pound; and second, that a large lump sum can shunt you into a higher tax band for the year. This guide explains what is exempt, how the excess is taxed, and how to soften the blow.

What the £30,000 exemption covers

The £30,000 exemption applies to a genuine termination payment — broadly, compensation for the loss of your job, where you are not simply being paid for work you would have done. This typically includes:

• Statutory redundancy pay (the legal minimum based on age, length of service and weekly pay).
• Enhanced/contractual redundancy pay above the statutory minimum.
• Ex-gratia compensation payments for loss of employment.

These genuine compensation elements are added together, and the first £30,000 of the total is tax-free and NI-free. Only the amount above £30,000 is taxable. You can work out the statutory portion with the

.

What is NOT covered: PILON, holiday and bonuses

This is where it gets expensive. Several common elements of a leaving package are fully taxable and do not use the £30,000 exemption:

• Pay in lieu of notice (PILON): since 2018, all PILON is treated as normal earnings — fully subject to income tax and National Insurance — even if your contract has no PILON clause. HMRC calculates a figure called post-employment notice pay (PENP) to ensure notice pay cannot be dressed up as tax-free compensation.
• Outstanding holiday pay: taxable earnings.
• Bonuses and commission owed: taxable earnings.
• Unpaid salary up to your leaving date: taxable earnings.

These are taxed before the £30,000 exemption is even applied to the genuine redundancy element. So a headline "£45,000 package" might contain far less than £30,000 of genuinely tax-free money once PILON and holiday are stripped out.

How the excess over £30,000 is taxed

The taxable excess — the genuine redundancy compensation above £30,000, plus all the fully-taxable elements like PILON — is added to your other income for the year and taxed at your marginal rate:

• 20% within the basic-rate band.
• 40% in the higher-rate band.
• 45% in the additional-rate band.

Because a redundancy payment is a one-off lump sum landing on top of the salary you have already earned, it often pushes a chunk of the package into a higher band than your normal pay. Someone normally a basic-rate taxpayer can find part of their redundancy taxed at 40%. Model the year's total with the

.

Worked example: a £50,000 package

Emma is made redundant part way through the year. Her package is:

• £35,000 genuine enhanced redundancy compensation.
• £10,000 PILON.
• £5,000 holiday and outstanding salary.

Her salary already earned that year was £30,000.

Step 1 — the genuine compensation: £35,000, of which £30,000 is tax-free. The remaining £5,000 is taxable.

Step 2 — fully taxable elements: the £10,000 PILON and £5,000 holiday/salary are fully taxable (and subject to NI).

Step 3 — total taxable from the package: £5,000 + £10,000 + £5,000 = £20,000, stacked on top of her £30,000 salary already earned. Her total income for the year is roughly £50,000, so most of the taxable package sits around the basic/higher-rate boundary, with the top slice edging into 40%.

Only the £30,000 genuine-compensation slice escaped tax entirely; everything else was taxed as income. See the take-home effect with the

.

The £100,000 trap for larger packages

For higher earners, a big redundancy payment can do more than push you into the 40% band — it can drag your income above £100,000, where the personal allowance is tapered away by £1 for every £2 of income, creating an effective marginal rate of around 60% between £100,000 and £125,140.

So a senior employee with a large package can find the excess over £30,000 taxed not just at 40% or 45%, but partly at the punishing 60% taper rate. This is precisely the situation where pension diversion (below) is most valuable.

How to reduce the tax: pension diversion

The single most effective way to cut the tax on a large redundancy package is to ask your employer to pay some or all of the taxable excess directly into your pension as an employer contribution.

• An employer pension contribution is not taxed as your income, so the diverted amount avoids income tax entirely.
• It is subject to your annual allowance (£60,000 for 2026/27, or your tapered/available figure including carry forward).
• It is especially powerful if the package would otherwise push you into the 40%, 45% or 60% taper zones.

For example, if Emma above asked for the £5,000 taxable redundancy excess to be paid into her pension, that £5,000 would avoid income tax altogether and grow for retirement instead. The arrangement must be set up before the payment is made and agreed with the employer in the settlement. Model the contribution with the

.

What post-employment notice pay (PENP) actually means

The 2018 rules introduced a formula called post-employment notice pay (PENP) specifically to stop notice pay being rebadged as tax-free compensation. In essence, HMRC works out how much of your termination package represents the basic pay you would have earned during your notice period had you worked it. That slice is treated as fully taxable earnings, regardless of what the settlement agreement calls it, and it does not benefit from the £30,000 exemption.

The practical upshot is that you cannot escape tax on notice pay simply by labelling a payment "compensation" or "ex-gratia". If you leave with, say, three months' notice unworked, HMRC expects three months of basic pay to be taxed as earnings, with only the genuine excess compensation flowing into the £30,000 exemption. Employers calculate PENP as part of payroll, but it is worth understanding so the breakdown your employer provides makes sense. If your contract has a clear PILON clause, the notice element is simply taxed as PILON; if it does not, the PENP formula achieves the same result.

Statutory redundancy pay and the package as a whole

It helps to separate the statutory minimum from any enhanced element. Statutory redundancy pay is calculated from your age, length of continuous service (capped at 20 years) and a capped weekly pay figure — you can work out the statutory entitlement with the

. Both the statutory amount and any enhanced contractual top-up are genuine compensation and so feed into the £30,000 exemption together.

Where packages get large is the enhanced element: many employers offer a multiple of the statutory figure, or a set number of weeks' pay per year of service well above the legal floor. It is this enhanced compensation that most often pushes the genuine-compensation total above £30,000 and into taxable territory — and it is the part most suited to pension diversion, because it is genuine compensation the employer can usually agree to redirect.

Timing the payment across the tax year

Because the taxable excess stacks on your other income for the year, when the payment falls can change the tax materially. If you are made redundant late in a tax year, much of your annual personal allowance and basic-rate band may already be used by salary, so the excess is taxed at higher rates. If the payment can legitimately fall early in the next tax year — when you have a fresh personal allowance and basic-rate band, and possibly lower income if you are between jobs — more of it may be taxed at lower rates. This is not always within your control, but where there is flexibility in the leaving date or payment date, it is worth modelling both scenarios with the

.

Emergency tax and getting a refund

Redundancy payments are often processed through payroll with an emergency tax code or on a one-off basis, which can over-tax the lump sum — sometimes substantially. If too much was deducted:

• You can reclaim it during the year using HMRC's online forms, or
• It is reconciled after the tax year ends, with a refund if you overpaid.

If you do not start a new job immediately, leaving you with a lower income for the rest of the year than the payroll assumed, an overpayment is common. Check your final tax position rather than assuming the payroll figure was correct.

Settlement agreements and legal costs

Many redundancies are formalised in a settlement agreement. A few tax points:

• A genuine compensation for loss of office in the agreement still benefits from the £30,000 exemption.
• Payments labelled as PILON, bonus or holiday remain fully taxable however the agreement words them — labels do not override the PENP rules.
• Legal fees your employer pays for advice on the settlement are usually tax-free if they meet HMRC's conditions.

Always get the breakdown checked, because how each line is characterised drives the tax.

Practical steps for 2026/27

1. Get a written breakdown of every element of your package.
2. Identify the genuine compensation — only this uses the £30,000 exemption.
3. Treat PILON, holiday and bonus as fully taxable earnings.
4. Check whether the excess pushes you into 40%, 45% or the £100,000 taper.
5. Consider pension diversion of the taxable excess to avoid income tax.
6. Watch for emergency tax and reclaim any overpayment.

Putting it all together

Redundancy pay is generously treated up to £30,000 of genuine compensation, which is tax-free and NI-free. But the excess is taxed as income at your marginal rate, and crucially PILON, holiday pay and bonuses fall entirely outside the exemption. A large lump sum can push you into the 40%, 45% or even 60% taper zone for the year, so the headline figure rarely reflects what you keep. The best mitigation is usually to divert the taxable excess into a pension, avoiding income tax while building retirement savings — and to reclaim any emergency tax deducted. Get a written breakdown, and model the numbers with the

and the .

Quick reference: the 2026/27 numbers

• Tax-free exemption: £30,000 of genuine redundancy compensation (also NI-free).
• Excess over £30,000: taxed at marginal rate (20/40/45%).
• PILON, holiday, bonus: fully taxable and subject to NI — no exemption.
• £100,000 taper: large packages can trigger the ~60% effective rate.
• Pension diversion: employer contributions avoid income tax, within the annual allowance.

Common mistakes to avoid

• Assuming the whole package is tax-free up to £30,000 — only genuine compensation qualifies.
• Treating PILON as exempt — it has been fully taxable since 2018.
• Ignoring the band effect — a lump sum can push the excess into 40% or the £100,000 taper.
• Not considering pension diversion of the taxable excess, the most effective mitigation.
• Accepting the payroll tax without checking for an emergency-tax overpayment.

Redundancy is stressful enough without an avoidable tax surprise. Establish what is genuine compensation, expect PILON and holiday to be taxed in full, and consider diverting the excess into a pension. Model your real take-home with the

and the .

This article is general information, not financial advice. Figures use 2026/27 UK rules. Settlement agreements and PENP calculations are detailed — consider professional advice on a large package.