UK Redundancy Pay & Tax Treatment -- Complete Guide 2026/27
How statutory redundancy pay is calculated, the GBP30,000 tax-free exemption, the post-2018 PILON rules, settlement agreements, enhanced redundancy negotiation, and how a redundancy package affects your benefits and NI record.
What Is Statutory Redundancy Pay?
When an employer makes a role redundant, any employee with at least two years of continuous employment is entitled to statutory redundancy pay (SRP). SRP is a legal minimum set by the Employment Rights Act 1996. Many employers offer more -- this is called enhanced or contractual redundancy pay.
Redundancy itself must be a genuine redundancy situation: the employer no longer needs that type of work done, the workplace is closing, or the workforce is being reduced. If an employer dismisses someone and calls it redundancy without a genuine business reason, it can be challenged as unfair dismissal.
You qualify if you have worked continuously for the same employer (or a connected employer) for at least two full years. Part-time workers, fixed-term employees and agency workers can qualify in the same way as full-time staff.
The Statutory Redundancy Pay Formula
SRP is calculated in weeks of pay based on age bands and years of service:
| Age during service year | Weeks of pay per year |
|---|---|
| Under 22 | 0.5 weeks |
| 22 to 40 | 1 week |
| 41 and over | 1.5 weeks |
Only the last 20 years of employment count. Weekly pay is capped -- at GBP751 per week for 2026/27. If you earn less than GBP751 per week, your actual weekly pay is used.
The maximum statutory redundancy payment is GBP22,530 (20 years service, all aged 41 or over, at the GBP751 cap: 20 x 1.5 x GBP751).
Only complete years of service count. Part years are ignored. Use the government's statutory redundancy pay calculator at gov.uk/calculate-your-redundancy-pay for an exact figure.
The GBP30,000 Tax-Free Exemption
Under section 401 of ITEPA 2003, the first GBP30,000 of a genuine termination payment is free of income tax and National Insurance. This exemption covers:
- Statutory redundancy pay (SRP)
- Non-contractual enhanced redundancy payments above SRP
- Ex-gratia (goodwill) payments on termination
- Certain damages for injury to feelings or personal injury relating to employment
The GBP30,000 is a single limit per employment, not per tax year. It covers the total of all qualifying termination payments from that employment. If you receive SRP of GBP10,000 and enhanced redundancy of GBP25,000, the combined GBP35,000 means GBP30,000 is tax-free and GBP5,000 is taxable income.
The excess above GBP30,000 is taxed as income in the year it is received, using your marginal rate (20%, 40% or 45% depending on total income that year). Crucially, the excess is not subject to National Insurance -- unlike PILON, which is (see below).
PILON: Pay in Lieu of Notice
PILON is a cash payment made instead of requiring you to work your notice period. Since 6 April 2018, PILON is always treated as taxable employment income, subject to income tax and National Insurance. This applies whether or not your employment contract contains a PILON clause.
Before April 2018, employers without a PILON clause could sometimes package notice pay within the GBP30,000 exemption. That loophole is now closed. HMRC uses the Post-Employment Notice Pay (PENP) formula to identify the taxable notice element:
Where: BP = basic pay in the last pay period; D = days in last pay period; P = post-employment notice period in days; T = any notice pay already taxed
In plain terms: the basic pay you would have earned had you worked your full statutory or contractual notice (whichever is longer) is always taxable as earnings. Holiday pay accrued but not taken is also taxable as earnings.
If your employer gives you working notice (you actually work the notice period), there is no PILON issue -- you receive salary normally, with PAYE applied in the usual way.
Settlement Agreements
A settlement agreement is a legally binding contract under which you waive your right to bring employment tribunal claims in exchange for an agreed payment. To be valid:
- The agreement must be in writing
- You must receive independent legal advice from a qualified adviser
- The adviser must be identified in the agreement and have professional indemnity insurance
- The agreement must cover the specific complaints being settled
Settlement payments typically contain several elements. The tax treatment of each component follows the rules above:
| Payment element | Tax treatment | NI? |
|---|---|---|
| Outstanding salary / holiday pay | Fully taxable as earnings | Yes |
| PILON (notice pay) | Fully taxable as earnings (PENP) | Yes |
| Statutory redundancy pay | Counts toward GBP30,000 exemption | No (if within GBP30k) |
| Enhanced / ex-gratia (non-contractual) | Counts toward GBP30,000 exemption | No (if within GBP30k) |
| Excess above GBP30,000 | Taxable income | No |
| Legal fees (paid to solicitor) | Usually tax-free | No |
Employer payments to a registered pension scheme on your behalf as part of a settlement can also be structured tax-efficiently, but specialist advice is needed to confirm the limits apply.
Negotiating Enhanced Redundancy
Statutory redundancy pay is only the floor. In collective redundancies (20 or more employees within 90 days), employers must consult with employee representatives and you may have more leverage. Even in individual redundancies, there is often room to negotiate:
- Enhanced redundancy multiplier: Many employers use 1.5x or 2x the statutory formula. Check your contract and staff handbook.
- Contractual vs discretionary: If your contract is silent, any enhancement is discretionary and therefore non-contractual -- it falls within the GBP30,000 exemption.
- Notice period: Ensure the full notice (contractual or statutory, whichever is longer) is reflected in the package.
- Outplacement support: Career coaching and CV assistance provided (not cash in hand) is typically tax-free.
- Reference: Agree the wording of your reference in writing as part of the settlement.
- Gardening leave: If asked to take gardening leave (paid but not working), salary continues as normal employment income -- it does not benefit from the GBP30,000 exemption.
Always take independent legal advice before signing a settlement agreement. The cost of that advice is often paid by the employer and is tax-free to you.
Impact on Benefits and Tax Credits
A redundancy lump sum can affect your entitlement to means-tested benefits:
| Benefit | How redundancy pay affects it |
|---|---|
| Universal Credit | Lump sum is capital. Under GBP6,000: ignored. GBP6,000-GBP16,000: tariff income reduces UC. Over GBP16,000: generally ineligible until capital falls below threshold. |
| New Style JSA / ESA | Based on NI record, not means-tested. Redundancy lump sum does not directly affect entitlement, but you may need to wait until notice period earnings end. |
| Tax Credits (legacy) | Taxable redundancy above GBP30,000 counts as income for the tax year. Notify HMRC if income drops significantly to avoid overpayments. |
| Council Tax Reduction | Locally administered -- capital rules similar to UC but vary by council. |
You should also check the single person council tax discount (25% off) if you live alone after a household change linked to redundancy, and ensure your tax code is updated for the new tax year to avoid over- or under-paying.
National Insurance on Redundancy Pay
The NI treatment of redundancy follows the income tax split:
- SRP and non-contractual termination payments up to GBP30,000: No employee or employer NI. Employer NI Class 1A does not apply to these amounts.
- Termination payments above GBP30,000: Subject to income tax only -- still no employee NI but employer Class 1A NI at 13.8% (and from April 2025 effectively 15% under the new employer NI rate above the GBP5,000 secondary threshold) applies on the excess.
- PILON: Fully treated as earnings, so employee NI (8% on earnings between GBP12,570 and GBP50,270; 2% above GBP50,270) and employer NI (15% above GBP5,000 secondary threshold) both apply.
Because the excess above GBP30,000 carries income tax but no employee NI, your net take-home from redundancy above the threshold is generally better than equivalent salary, even though you cannot contribute it to a pension unless you have other earnings.