Employment Law Guide · 2026/27
Redundancy Pay Tax 2026/27: Complete Guide to the GBP 30,000 Exemption
When you are made redundant, you may receive a tax-free redundancy payment up to GBP 30,000. But the rules are complex: statutory redundancy is capped, PILONs are always taxable, and settlement agreements can trigger different rules. This guide explains exactly what is tax-free, how to calculate your entitlement, and how settlement agreements are treated.
The GBP 30,000 Tax-Free Exemption
The most important rule: the first GBP 30,000 of redundancy pay from your employer is completely tax-free. This applies if the payment is made genuinely in connection with your dismissal due to redundancy, and the payment is ex gratia (not already contractually guaranteed wages for work).
Any amount above GBP 30,000 is fully taxable as income and subject to income tax at your marginal rate (20%, 40%, or 45%), and National Insurance. Your employer should deduct PAYE tax when paying the excess, but you will also owe NI contributions.
Example calculation
- Statutory redundancy: GBP 15,000 (tax-free)
- Enhanced redundancy package: GBP 18,000 (tax-free, under GBP 30,000 threshold)
- Total: GBP 33,000
- Tax due: 20% × (GBP 33,000 – GBP 30,000) = GBP 600 income tax (plus NI)
Statutory Redundancy Entitlement
Your employer must pay statutory redundancy if you are dismissed due to redundancy, provided you have at least two years' continuous service. The amount is calculated by a fixed formula based on your age and years of service.
Statutory redundancy formula (2026/27)
| Age band | Weeks per year of service | Weekly cap (2026/27) |
|---|---|---|
| Under 22 | 0.5 weeks | GBP 551 |
| 22 to 40 | 1 week | GBP 719 |
| 41 and over | 1.5 weeks | GBP 878 |
Maximum years counted: 20 years. Maximum statutory redundancy: GBP 22,530.
Worked examples
- Age 30, 5 years service: 1 week × 5 years × GBP 719 = GBP 3,595
- Age 45, 10 years service: 1.5 weeks × 10 years × GBP 878 = GBP 13,170
- Age 50, 25 years service (capped at 20): 1.5 weeks × 20 years × GBP 878 = GBP 26,340 (capped at GBP 22,530)
Enhanced Redundancy Packages
Employers often offer enhanced redundancy on top of the statutory minimum. For example, they might offer 1.5 weeks' pay per year of service instead of 1 week. All enhanced payments count toward the GBP 30,000 tax-free exemption, as long as they are genuine redundancy compensation.
Key condition: the enhanced payment must be 'ex gratia' -- a genuine payment in connection with redundancy, not wages owed for work performed. If your contract guarantees additional weeks, or if the extra payment is deemed 'disguised wages,' HMRC may challenge the tax-free treatment.
If you receive enhanced redundancy totalling GBP 50,000 (statutory GBP 15,000 + enhanced GBP 35,000), only GBP 30,000 is tax-free; you pay income tax and NI on the remaining GBP 20,000.
PILONs (Payment in Lieu of Notice)
A PILON is a lump sum payment made in place of working your notice period. PILONs do not benefit from the GBP 30,000 exemption -- they are always treated as taxable income and subject to National Insurance, even if paid as part of a redundancy settlement.
HMRC changed the rules from April 2018. Before that date, PILONs could sometimes be tax-free under specific conditions. Now, PILONs are treated as income and assessed to PAYE tax and NI by your employer when you leave.
Example with PILON
- Statutory redundancy: GBP 10,000 (tax-free, under GBP 30,000)
- Enhanced redundancy: GBP 15,000 (tax-free, under GBP 30,000)
- PILON (for 3-month notice): GBP 12,000 (TAXABLE as income + NI)
- Tax due on PILON: 20% × GBP 12,000 = GBP 2,400 (plus NI ~8-10%)
Your employer should deduct PAYE from the PILON before paying you, and report it separately on your P45.
Settlement Agreements and Tax Treatment
A settlement agreement (also called 'compromise agreement') is a formal agreement to end employment and often includes a lump-sum payment in return for releasing claims. The tax treatment depends on the nature of the payment and whether it is genuinely redundancy-related.
Redundancy-related settlement
If the settlement is in connection with redundancy, payments count toward the GBP 30,000 exemption. A typical settlement structure might include:
- Statutory redundancy (tax-free)
- Enhanced redundancy / severance (tax-free, up to GBP 30,000 total)
- PILON (taxable)
- Accrued holiday pay (taxable as normal wages)
- Outplacement support payment (may be tax-free or subject to GBP 15,480 annual limit)
Discrimination / unfair dismissal settlement
If a settlement is paid to resolve a claim for discrimination, unfair dismissal, or breach of contract (not redundancy), different rules apply:
- Discrimination damages (e.g., race, gender, disability): fully tax-free
- Unfair dismissal awards: basic award (statutory) is tax-free; compensatory award is partly tax-free up to GBP 30,000
- Breach of contract: may be tax-free if settled pre-employment; taxable post-employment
Key lesson: ensure your settlement letter clearly specifies which part of the payment is redundancy and which part is compensation for other claims. This helps your accountant allocate it correctly for tax purposes.
Garden Leave and Post-Employment Notice Pay
Garden leave (paid leave during notice period without attending work) is treated as normal wages. It is fully taxable as income and subject to National Insurance, and does not count toward the GBP 30,000 exemption. Your employer must deduct PAYE tax and NI.
Post-Employment Notice Pay (PENP) is a payment made after employment endsfor obligations under the notice period. The tax treatment of PENP is complex and depends on whether the notice period is satisfied at the time of payment. In most cases, PENP is also taxable. Seek professional advice if you receive a substantial PENP.
National Insurance on Redundancy
Statutory redundancy and genuine ex gratia redundancy payments do not attract National Insurance. This is a major tax advantage. If you receive GBP 30,000 in pure redundancy, you pay no income tax and no NI.
Exception: if you receive enhanced redundancy that pushes the total above GBP 30,000, the excess is taxable income and subject to:
- Income tax at your marginal rate (20%, 40%, or 45%)
- Employee NI at 8% (if earnings between GBP 12,570–GBP 50,270), 10% (above GBP 50,270), or 2% (above GBP 125,140)
PILONs are also subject to both income tax and National Insurance.
EIS-ER (Employee Shares) on Redundancy
If you hold shares acquired under the Enterprise Investment Scheme (EIS), Employee Share Scheme (ESS), or Share Save scheme, redundancy may trigger a disposal of those shares. Consult your scheme administrator and a tax advisor, as the treatment depends on your scheme rules and how long you held the shares.
Contractual vs. Statutory Redundancy
Statutory redundancyis the legal minimum entitlement. Your employer must pay it if you are made redundant and have at least two years' service. The amount is capped at GBP 22,530 (for 2026/27).
Contractual redundancy is any top-up your employer chooses to offer. This might be multiple weeks per year, or a percentage of salary. Both statutory and contractual amounts count toward the GBP 30,000 tax-free exemption. However, if a contractual payment is deemed to be wages for work performed (not genuine redundancy), HMRC may challenge the tax-free treatment.
Pension and Redundancy
Redundancy does not affect your legal right to continue contributing to a personal pension or your workplace pension scheme. You can keep paying into a pension after redundancy (subject to contribution limits).
Some defined-benefit (final-salary) workplace pensions have specific redundancy rules. Your scheme may allow:
- Early retirement (with or without actuarial reduction)
- Enhanced pension terms
- Lump-sum commutation of pension
Check your scheme's Trust Deed and Rules. Some redundancy settlements include an employer pension contribution -- this is a taxable benefit (subject to the annual GBP 60,000 allowance and additional taxes).
Reporting Redundancy Pay to HMRC
You must report all redundancy payments to HMRC. Your employer will issue a P45 when you leave, showing the total redundancy paid and any amount on which PAYE tax was deducted.
If your total redundancy is under GBP 30,000: no tax is due, but report it in your tax return (on the 'employment' page, or 'other income' if no longer employed). Your employer should have coded it as non-taxable.
If your total redundancy exceeds GBP 30,000: report the excess on your Self Assessment tax return. Your employer should have deducted PAYE on the amount over GBP 30,000 when you left.
Use our Income Tax Calculator to estimate the tax on any redundancy payment above GBP 30,000.
Worked Example: Complete Redundancy Package
Scenario: Amy, age 42, has worked for Company X for 12 years. She is made redundant. Her settlement agreement includes:
- Statutory redundancy (1.5 weeks × 12 years × GBP 878): GBP 15,804
- Enhanced redundancy (0.5 weeks per year × 12 × GBP 878): GBP 5,268
- PILON for 2-month notice (calculated at her normal salary): GBP 8,000
- Accrued holiday pay: GBP 2,400
Tax treatment:
- Statutory + Enhanced: GBP 15,804 + GBP 5,268 = GBP 21,072 (all tax-free, under GBP 30,000 limit)
- PILON: GBP 8,000 (taxable as income + NI)
- Holiday pay: GBP 2,400 (taxable as income + NI)
- Total tax-free: GBP 21,072
- Total taxable: GBP 8,000 + GBP 2,400 = GBP 10,400
- Estimated income tax (20% basic rate): GBP 2,080
- Estimated NI (8%): GBP 832
- Net payment to Amy: (GBP 21,072 + GBP 10,400) – GBP 2,080 – GBP 832 = GBP 28,560 (approx.)
Frequently Asked Questions
Is redundancy pay completely tax-free?
Not entirely. Statutory redundancy pay is partially tax-free — the first GBP 30,000 is completely tax-free if it comes from your employer as genuine redundancy pay. Anything above GBP 30,000 is fully taxable as income and subject to income tax and National Insurance.
Additionally, statutory redundancy is capped: maximum 0.5 weeks per year aged under 22, 1 week per year aged 22+, and 1.5 weeks per year aged 41+. The weekly rate is capped at GBP 751 (2026/27), so maximum statutory redundancy is GBP 22,530.
How is PILON (Payment in Lieu of Notice) taxed?
PILONs are always taxable as income — they do not benefit from the GBP 30,000 exemption, even if paid as part of redundancy. This means PILONs are subject to income tax and National Insurance at your marginal rate.
A PILON is a payment made in place of working your notice period. From April 2018, even if your contract allows PILONs, HMRC treats them as income. Your employer should deduct PAYE tax and NI from PILONs via payroll, and these should not be included in your GBP 30,000 tax-free allowance.
What can I claim toward the GBP 30,000 tax-free allowance?
The GBP 30,000 exemption applies to ex gratia payments made by your employer in connection with termination of employment, including:
- Genuine statutory redundancy pay (first GBP 22,530 max)
- Enhanced redundancy packages (beyond statutory)
- Compensation for loss of office (agreed settlement amounts)
- Payment for accrued but untaken holiday (only if truly redundancy-related)
Does NOT count: PILONs, normal wages for notice period actually worked, payment for future services, benefits-in-kind, outplacement coaching costs paid to third parties (unless treated as pay).
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What if I was made redundant twice?
Each redundancy event is treated separately. You get a fresh GBP 30,000 exemption for each genuine redundancy from a different employer (or a genuinely separate termination from the same employer).
However, if the second redundancy is within the same tax year as the first, the combined total tax-free payment cannot exceed GBP 30,000 across both events in that year. HMRC will examine whether both are genuine redundancies or whether one is an attempt to circumvent the per-person limit.
Are settlement agreements taxed differently from redundancy?
Settlement agreements (sometimes called 'compromise agreements') that end employment can benefit from the GBP 30,000 tax-free allowance if they are compensation for genuine loss of office due to redundancy.
Key condition: the payment must be made in connection with termination of employment. If it is purely compensation for injury to feelings, discrimination, or breach of contract (not redundancy), different rules apply — some awards (like discrimination) are fully tax-free, others are not.
Settlement agreements often include: statutory redundancy, enhanced package, compensation, and garden leave. Ensure your settlement letter specifies which part is redundancy and which is other compensation, so your accountant can allocate it correctly.
Do I pay National Insurance on redundancy pay?
Statutory redundancy and genuine ex gratia redundancy payments do not attract National Insurance. This is a significant advantage — you save both income tax (after GBP 30,000) and NI contributions.
Exception: PILONs are subject to both income tax and National Insurance. Also, if you receive enhanced redundancy that pushes you over GBP 30,000, the excess is taxable as income and will incur NI at your rate (8%, 10% or 12% depending on your salary band).
Can I take redundancy and then continue my pension?
Yes. Redundancy does not affect your personal pension contributions or workplace pension rights. You continue to pay into your pension as normal (or you can adjust contributions if your income changes).
Important: some defined-benefit (final-salary) pensions have specific redundancy clauses that may allow early retirement or enhanced pensions. Check your scheme rules. Some redundancy packages include a one-off employer pension contribution — this is treated as a benefit and may have tax implications (likely subject to the GBP 60,000 annual allowance and GBP 3,600 tax-free threshold per year, depending on structure).
How do I calculate statutory redundancy amount?
Statutory redundancy formula:
- GBP 551 × years of service aged under 22
- GBP 719 × years of service aged 22 to 40
- GBP 878 × years of service aged 41+
Each year of service is capped at 0.5 weeks (under 22), 1 week (22–40), and 1.5 weeks (41+). Maximum 20 years counted. Weekly cap for 2026/27 is GBP 751, so maximum statutory redundancy is GBP 22,530.
Example: A 45-year-old with 10 years service:
= 1.5 weeks × 10 years × GBP 751 = GBP 11,265
What is the difference between contractual and statutory redundancy?
Statutory redundancy is the legal minimum your employer must pay by law if made redundant. The amount is fixed by formula (see above) and is capped at GBP 22,530 for 2026/27.
Contractual redundancy is any enhanced package your employer chooses to offer above the statutory minimum. This might be multiple weeks' pay per year of service, or a lump sum. Both statutory and contractual redundancy count toward the GBP 30,000 tax-free allowance, but the weekly cap (GBP 751) only applies to statutory amounts.
Is garden leave and post-employment notice pay taxed?
Garden leave during notice period (paid leave while not working) is treated as normal wages and is fully taxable as income and subject to National Insurance. It does not benefit from the GBP 30,000 exemption.
Post-Employment Notice Pay (PENP) — new from April 2018 — is a payment made after employment ends for obligations under the notice period. Unlike PILONs paid during employment, PENP is treated differently: if the original notice period is satisfied, PENP may fall outside the GBP 30,000 allowance. HMRC guidance is complex here; seek advice if you receive PENP.
Do I need to report redundancy pay in my tax return?
You must report all redundancy pay to HMRC, but only amounts above GBP 30,000 are taxable. If you receive only statutory or enhanced redundancy up to GBP 30,000, no tax is due, but you may still need to report it if your employer does not flag it as tax-free.
If you receive PILONs or amounts over GBP 30,000, your employer should have deducted PAYE tax on the amount over GBP 30,000. Check your P45 issued when you leave — it should show total redundancy paid and amounts subject to tax. Report the taxable portion on your Self Assessment return (box for 'other income').