Enhanced Redundancy Pay: Tax Treatment and the GBP30,000 Exemption 2026/27

What Is Enhanced Redundancy Pay?

When an employer makes an employee redundant, they are legally required to pay statutory redundancy pay if the employee has at least two years of continuous employment. Many employers go further and offer enhanced redundancy pay -- an amount above the statutory minimum as a gesture of goodwill, as a contractual obligation, or as an incentive to accept voluntary redundancy.

Enhanced redundancy pay can take various forms:

• A multiple of statutory redundancy (for example, twice or three times the statutory amount)
• A set number of weeks' pay per year of service (without the statutory weekly cap)
• A fixed ex gratia lump sum
• A combination of all three

The tax treatment of enhanced redundancy pay is governed by the termination payment rules in Part 6 of ITEPA 2003, which provides for the GBP30,000 income tax exemption on genuine termination payments.

Statutory Redundancy Pay: The Foundation

Before looking at enhanced payments, it is important to understand how statutory redundancy pay is calculated, as the statutory amount is part of the overall GBP30,000 exempt pool.

The Statutory Calculation

Statutory redundancy pay is based on:

• Age of the employee at the time of redundancy
• Length of continuous employment (maximum 20 years counted)
• Weekly pay (subject to a statutory cap)

The weekly pay cap for 2026/27 is GBP751 per week. If an employee earns more than GBP751 per week, only GBP751 is used in the calculation.

The number of weeks' pay per year of service is:

• 0.5 week per year of service under age 22
• 1 week per year of service aged 22-40
• 1.5 weeks per year of service aged 41 and over

The maximum statutory redundancy payment is therefore: 20 years x 1.5 weeks x GBP751 = GBP22,530.

Statutory redundancy pay is exempt from income tax and NI as it falls within the GBP30,000 exemption.

Example: Statutory Calculation

An employee aged 45 with 10 years' service earning GBP1,200 per week:

• Weekly pay is capped at GBP751
• 10 years at age 41+: 10 x 1.5 x GBP751 = GBP11,265

Statutory redundancy = GBP11,265. This falls comfortably within the GBP30,000 exemption.

The GBP30,000 Termination Payment Exemption

Section 403 ITEPA 2003 provides that the first GBP30,000 of a qualifying termination payment is exempt from income tax. The exemption has been at this level since 1988 and has not been increased since.

For the exemption to apply, the payment must:

• Be made in connection with the termination of employment
• Not be earnings under the employment contract (contractual pay, PILON, garden leave, or payment in lieu of holiday)
• Not be caught by the PENP rules (which carve out the PILON-equivalent amount)

The GBP30,000 is a single exemption that covers the total qualifying amount across all elements of the termination package. If an employee receives:

• Statutory redundancy: GBP11,265
• Enhanced redundancy (ex gratia): GBP22,000

Total: GBP33,265. The first GBP30,000 is exempt; the remaining GBP3,265 is taxable as income at the employee's marginal rate.

What Cannot Use the GBP30,000 Exemption?

The following are specifically excluded from the exemption and are always taxable as earnings:

• PILON and the PENP-equivalent amount (calculated by the PENP formula)
• Garden leave pay (received while still employed)
• Holiday pay owed at termination date
• Bonuses earned but unpaid at termination
• Salary in lieu of notice where this was contractually owed
• Payments for agreeing to restrictive covenants

These amounts are taxable as earnings even if they happen to be paid at the same time as the redundancy payment.

Tax on Amounts Above GBP30,000

Where the total qualifying termination payment exceeds GBP30,000, the excess is taxable. The tax treatment depends on the nature of the excess:

Income Tax

The excess above GBP30,000 is subject to income tax at the employee's marginal rate. For a basic rate taxpayer, this is 20%. For a higher rate taxpayer, it is 40%. For an additional rate taxpayer, it is 45%.

The excess is added to the employee's income for the tax year and assessed through Self Assessment (if the employee completes a return) or via a PAYE adjustment.

National Insurance: An Important Distinction

There is an important asymmetry in the NI treatment of the excess above GBP30,000:

• Employee NI: The excess is exempt from employee National Insurance contributions. This is different from income tax, where the excess is fully taxable.

• Employer NI: The employer pays Class 1A National Insurance at 13.8% on the excess above GBP30,000. This Class 1A NI is due via the employer's PAYE return (not through Class 1 NI). It is payable by 19/22 July following the end of the tax year in which the termination payment was made.

This means that for an employee in the higher rate band, a GBP50,000 excess above GBP30,000 results in:

• Employee: GBP50,000 x 40% = GBP20,000 income tax. No employee NI.
• Employer: GBP50,000 x 13.8% = GBP6,900 Class 1A NI.

Interaction With the PENP Rules

From April 2018, the PENP formula must be applied to every termination payment to identify the PILON-equivalent amount. Only after this PENP has been identified and carved out can the remaining amount benefit from the GBP30,000 exemption.

The sequence of calculations is:

1. Identify total termination payment
2. Calculate PENP (BP x D / P)
3. Deduct PENP from total -- PENP is taxable earnings
4. From the remaining amount, the first GBP30,000 is exempt from income tax and NI
5. Any further excess above GBP30,000 is subject to income tax (but not employee NI)

Example: Full Calculation

David earns GBP4,000 per month. He has a 3-month notice period and is made redundant with a total package of GBP60,000, of which:

• GBP20,000 is described as enhanced redundancy
• GBP12,000 is three months' PILON (GBP4,000 per month x 3)
• GBP28,000 is an ex gratia payment

PENP = GBP4,000 x 92 / 30 = GBP12,267.

Step 1: PENP of GBP12,267 is taxable as earnings (approximately GBP12,000 PILON + GBP267 additional).

Step 2: Remaining qualifying termination payment = GBP60,000 - GBP12,267 = GBP47,733.

Step 3: GBP30,000 exemption applies to the first GBP30,000 of GBP47,733.

Step 4: GBP17,733 excess is taxable as income (no employee NI). Employer NI: GBP17,733 x 13.8% = GBP2,447.

Voluntary Redundancy vs Compulsory Redundancy

The tax treatment is the same regardless of whether the redundancy is compulsory or voluntary. Enhanced voluntary redundancy packages qualify for the GBP30,000 exemption in the same way as compulsory redundancy payments, provided the payment is genuinely in connection with termination and not in the nature of earnings.

Some employers offer enhanced packages specifically to encourage voluntary redundancies. These are valid and the tax exemption applies, but HMRC will examine the underlying facts to confirm the payment is not a disguised bonus or contractual payment.

Pensions and Redundancy

In some redundancy packages, the employer may offer to contribute an additional amount to the employee's pension rather than (or in addition to) a cash payment. Employer pension contributions are not limited by the GBP30,000 exemption -- they are treated as employer pension contributions, not termination payments, and follow the pension annual allowance rules.

The pension annual allowance for 2026/27 is GBP60,000. Employer redundancy contributions count towards this allowance along with all other pension inputs for the year. Provided the total annual pension input does not exceed GBP60,000 (or the tapered allowance for very high earners), there is no annual allowance charge.

Directing part of a redundancy package into a pension can be highly tax-efficient for higher earners who have headroom within their annual allowance.

Contractual Enhanced Redundancy: Does It Affect the Exemption?

A question that often arises is whether contractual enhanced redundancy (where the employment contract specifies an enhanced payment) can still benefit from the GBP30,000 exemption.

HMRC's position is that the exemption applies to both contractual and non-contractual enhanced redundancy payments, provided they are genuinely in connection with termination. The fact that the payment is contractually required does not, in itself, disqualify it from the exemption.

However, the payment must still be a genuine termination payment rather than earnings that happen to be paid on termination. If the contract provides for a 'redundancy payment' that is in substance a contractual bonus linked to performance, HMRC may challenge the use of the exemption.

Multiple Terminations: The Lifetime Cap

There is no overall lifetime cap on how many times an individual can use the GBP30,000 exemption. Each genuine termination from each employment is a separate event, and the GBP30,000 exemption applies to each one independently.

However, within a single termination, the total exemption across all qualifying elements is one GBP30,000 -- it cannot be used multiple times for different elements of the same settlement.

Reporting and Compliance for Employers

Employers must ensure the correct PAYE treatment is applied to termination packages:

• PENP must be calculated and PAYE operated on it in the relevant payroll period
• The exempt portion (up to GBP30,000) should not have PAYE deducted
• The excess above GBP30,000 should have PAYE deducted at the employee's marginal rate
• Class 1A NI on the excess above GBP30,000 must be declared on form P11D(b) and paid by July

HMRC has increased scrutiny of termination payment compliance, and employers who fail to apply the PENP rules correctly face PAYE liabilities, interest, and penalties.

Summary

Enhanced redundancy pay benefits from the GBP30,000 income tax exemption, which covers statutory redundancy plus any non-contractual excess. The weekly pay cap for statutory redundancy is GBP751 in 2026/27. The PENP formula must be applied first to identify any PILON-equivalent amount, which is always taxable as earnings. Above GBP30,000, income tax applies at the marginal rate, but employee NI does not -- only employer Class 1A NI at 13.8%. Pension contributions as part of a redundancy package use a separate allowance and can be highly tax-efficient. Employers must comply with RTI and PENP rules to avoid PAYE liability.