Redundancy, Notice Pay and Garden Leave UK 2026

When your employment ends -- whether through redundancy, mutual agreement or a settlement -- the financial package you receive comes in several distinct components, each taxed differently. Understanding the difference between statutory redundancy pay, notice pay, garden leave and a settlement agreement is essential to ensuring you receive what you are owed and know what HMRC expects. The £30,000 tax-free threshold for genuine termination payments is a key planning point, but the rules around what falls inside it are easily misunderstood.

Statutory notice periods

The Employment Rights Act 1996 sets minimum notice entitlements:

• Less than 1 month of service: no statutory notice (though in practice contracts typically provide for at least 1 week).
• 1 month to 2 years of service: 1 week's notice.
• 2 to 12 years of service: 1 week per complete year.
• 12+ years: 12 weeks (the statutory cap).

Your employment contract can and usually does specify longer notice. Many professional and management roles have contractual notice of 1, 3 or 6 months. The higher of the statutory and contractual minimum applies.

Note that the statutory minimum is mutual -- you as the employee are also required to give at least 1 week's notice after one month of service. Your contractual notice period applies on both sides.

During a genuine notice period, you are entitled to your normal pay and benefits. If you are dismissed without notice (summarily dismissed), and that dismissal is not for gross misconduct, you are entitled to your notice pay in damages.

Pay in Lieu of Notice (PILON): the tax position

Since April 2018, all PILON is taxable as employment income. Before 2018, the position was more complex: PILON was only taxable if the contract included a PILON clause; otherwise it could sometimes be treated as compensation (within the £30,000 threshold). That distinction no longer exists.

The current rule (post-Finance Act 2017 changes) is straightforward: the amount you receive for the notice period you do not work is treated as earnings. Income tax at your marginal rate and employee National Insurance (8% within the basic-rate band, 2% above) apply in full.

Example: 3 months' PILON at £4,000/month gross = £12,000. If you are a higher-rate taxpayer: income tax at 40% = £4,800, NI at 2% (above £50,270) = £240. Net PILON received: approximately £6,960.

Garden leave: what it means in practice

Garden leave is a contractual arrangement (requiring an express garden leave clause) where:

• You remain employed under your contract.
• You are paid your full salary and receive your full benefits.
• You are instructed not to attend work and, typically, not to work for any other employer.
• The notice period runs and eventually expires, at which point employment ends.

During garden leave:

• Income tax and NI apply to salary and benefits in the normal way -- it is employment income.
• Employer pension contributions continue if they are contractual.
• You continue to accrue holiday entitlement.
• Restrictive covenants (non-compete, non-solicitation) typically begin running from the start of garden leave rather than from the end of employment -- extending the period of restriction in effect.

Garden leave protects employers from an employee working for a competitor during the notice period. For the employee, the financial value of garden leave versus PILON depends primarily on the value of employer pension contributions during the garden leave period.

The £30,000 tax-free threshold

Genuine termination payments -- compensation for the ending of employment rather than payment for work done -- benefit from a £30,000 tax-free threshold. This threshold covers:

• Statutory redundancy pay.
• Enhanced redundancy pay (employer's contractual or discretionary top-up above statutory).
• Compensation for loss of office (non-contractual payment on termination).
• Ex-gratia payments (goodwill payments from the employer).
• Settlement agreement payments that represent genuine compensation rather than deferred pay.

The threshold is per termination. If you are made redundant, each redundancy event has its own £30,000 limit.

Payments that do NOT qualify for the £30,000 threshold:

• PILON (fully taxable -- see above).
• Accrued holiday pay (fully taxable employment income).
• Notice pay worked normally (fully taxable).
• Bonus or commission earned before termination (fully taxable).
• Payments under a restrictive covenant agreement (taxable).
• Any payment made under a contractual entitlement as a term of employment.

Above £30,000, the excess is subject to income tax at your marginal rate. Unusually, employee National Insurance does not apply to the excess -- only employer Class 1A NI (at 15%) is due from the employer on the excess above £30,000.

Settlement agreements

A settlement agreement (governed by s147 of the Equality Act 2010 and s203 of the Employment Rights Act 1996) is a formal document that:

• Sets out the payment terms agreed between employer and employee.
• Waives the employee's right to bring specified tribunal claims.
• Requires the employee to have received independent legal advice from a qualified adviser (usually a solicitor) for the agreement to be legally binding.
• The employer typically contributes to the employee's legal costs (£250-£750 is common for a straightforward settlement).

For the agreement to be valid, the solicitor must confirm they have explained the terms to the employee, have not been appointed by the employer, and hold professional indemnity insurance.

Tax treatment of settlement agreement payments:

• Payments within the settlement that genuinely compensate for loss of employment are within the £30,000 threshold.
• Payments labelled as 'compensation' but which are really deferred salary, holiday pay or PILON are still taxable -- HMRC looks at the substance, not the label.
• Injury to feelings payments (for discrimination, harassment) are typically tax-free.
• Post-employment notice pay (PENP) -- a technical calculation of the PILON element of the settlement -- must be extracted and taxed even within a settlement, under the 2018 rules.

The PENP rules mean that within any settlement agreement involving payment in lieu of notice, a specific calculation is required to identify the PILON element, which is then taxable. The remainder (if genuinely compensation) can sit within the £30,000 threshold.

Restrictive covenants post-termination

Employment contracts for professional and management roles often include:

• Non-compete: prevents you joining a named competitor or starting a competing business for a period (typically 3-12 months).
• Non-solicitation: prevents you approaching the employer's clients or customers.
• Non-poaching: prevents you recruiting former colleagues.
• Confidentiality: prevents disclosure of trade secrets, client lists, pricing information.

Restrictive covenants are enforceable only if they are reasonable in all the circumstances -- protecting a legitimate business interest and going no further than necessary in scope, duration and geography. Courts regularly strike down unreasonably broad restrictions.

If your employer asks you to sign a new or additional restrictive covenant at the point of leaving (in exchange for enhanced redundancy), be aware that this consideration is taxable as employment income.

What to do when a redundancy or settlement is proposed

1. Read the redundancy package or draft settlement carefully. Identify each component: redundancy payment, PILON, notice period, holiday pay, bonus, other benefits.
2. Identify what falls within the £30,000 threshold (redundancy payment, ex-gratia compensation) and what is taxable employment income (PILON, holiday, accrued bonus).
3. Check your statutory entitlements. The statutory redundancy pay calculation (based on age, service and weekly pay capped at £719/week in 2026/27) is the floor -- your employer may be offering enhanced terms.
4. Seek independent advice. For settlement agreements, a solicitor's review is legally required for the agreement to be binding. For any significant package, independent financial advice on tax treatment is worthwhile.
5. Consider pension contributions. Redundancy pay (within the £30,000 threshold) does not count as earnings for pension purposes, but you may still be able to make additional pension contributions from other income in the tax year to offset the tax on any taxable elements.

Sources

• Employment Rights Act 1996
• Finance Act 2017 -- PILON taxation changes
• HMRC: Tax on termination payments (EIM13000)
• gov.uk: Redundancy -- your rights
• ACAS: Settlement agreements guidance