Pillar Guide · Updated June 2026
UK Redundancy Tax Treatment: The £30,000 Exemption, PILON and SA100 Reporting for 2026/27
When you are made redundant, the first £30,000 of your total termination package is tax-free and National Insurance-free under section 401 of the Income Tax (Earnings and Pensions) Act 2003. But the rules on what qualifies — and what is excluded — are intricate. Since April 2018, payment in lieu of notice (PILON) has been fully taxable under the post-employment notice pay (PENP) formula, regardless of how it is labelled. Garden leave pay, accrued holiday and bonuses never qualified. This guide explains exactly what counts toward the £30,000 threshold, how employer and employee NI applies above it, how to report on SA100, and how to legally maximise the tax-free element through pension contributions and smart structuring of settlement agreements.
The S.401 ITEPA £30,000 Exemption
Section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) provides that payments received in connection with the termination of employment — or a change in duties or emoluments — are exempt from income tax up to a cumulative £30,000 limit. This is not a per-payment threshold; it is the aggregate of all qualifying termination payments from the same employment. The £30,000 figure has remained unchanged since 1988 and is not indexed to inflation, which means its real value has eroded considerably over the decades.
The exemption applies to both income tax and employee National Insurance. Employer NI, however, applies on the excess above £30,000 at the Class 1A rate (15% in 2026/27), a change introduced from April 2020. Below the threshold, the payment is simply tax-free — no reporting needed unless your employer requests it or HMRC writes.
The key word in the legislation is “termination” — the payment must be connected with the ending of the employment. Payments for work done, accrued rights and contractual entitlements are not caught by section 401; they are earnings under section 62 and fully taxable as such. Section 401 is a sweeping-up provision for amounts that would not otherwise be employment income.
What Counts Toward the £30,000
The following categories of payment shelter within the £30,000 aggregate:
- Statutory redundancy pay: the age-banded formula payment is always within the £30,000 exemption. For 2026/27 the statutory cap is £751 per week and the maximum is £22,530 (30 years × 1.5 × £751 capped at 20 years service).
- Enhanced or contractual redundancy pay: amounts above the statutory minimum, paid by the employer under the contract, staff handbook or collective agreement, qualify up to the aggregate £30,000 limit.
- Ex-gratia payments: discretionary payments made in recognition of long service or as goodwill, with no legal obligation to pay, are caught by section 401 and shelter within the £30,000.
- Compensation for loss of office: payments made to a director or senior employee in connection with removal from office, provided they are genuinely compensatory and not disguised earnings.
- Injury to feelings (discrimination): damages paid to compensate for injured feelings in a discrimination claim are entirely outside the tax net (not even within section 401) under section 406 ITEPA — they are completely tax-free with no £30,000 limit. Only the personal injury / psychiatric injury element is excluded; distress from the manner of dismissal alone does not qualify.
What Does NOT Count — PILON, Garden Leave and Other Exclusions
The following items are treated as earnings under section 62 ITEPA and are fully taxable before they even reach the section 401 calculation:
| Payment type | Tax treatment | Reason |
|---|---|---|
| PILON (notice pay, PENP amount) | Fully taxable + employee NI | Post-employment notice pay rules since April 2018 |
| Garden leave pay | Fully taxable + employee NI | Normal salary — employment continues |
| Accrued holiday pay | Fully taxable + employee NI | Contractual entitlement — earnings |
| Unpaid salary / bonuses | Fully taxable + employee NI | Already earned — earnings |
| Benefits in kind provided in notice period | BiK rules apply (P11D) | Employment still ongoing |
| Shares vesting on termination | Share scheme rules apply | Schedule 2/3/4/5 ITEPA or unapproved rules |
The practical implication: your redundancy package total is the sum of all elements, but before applying the £30,000 exemption you must first strip out the PILON/PENP amount (fully taxable), accrued holiday (fully taxable) and any other earnings. Only the remaining “pure” termination payments shelter within the £30,000.
The PENP Formula Explained
The post-employment notice pay (PENP) formula determines how much of a termination payment represents the notice pay element and must therefore be treated as taxable earnings. The formula is:
- BP (Basic Pay) — gross basic pay in the last pay period before the “trigger date” (the date notice was given, or the employment contract date if the employment ended without notice)
- D (Days) — the number of days in the post-employment notice period (the statutory or contractual notice entitlement minus any period of notice actually worked)
- P (Period) — the number of days in the last pay period (typically 30 or 31 for monthly-paid employees, 7 for weekly-paid)
The PENP calculation ensures that you cannot avoid tax on notice pay simply by describing it as an ex-gratia payment. The basic pay used in BP excludes overtime, bonuses, commission, benefits in kind and salary sacrifice reductions — it is the contractual basic salary only.
Example: monthly-paid employee, £40,000 salary, 3 months contractual notice, no notice worked, termination payment of £40,000. BP = £40,000 / 12 = £3,333.33 per month. D = 92 days (3 months approximately). P = 31 days (last calendar month). PENP = (£3,333.33 × 92) / 31 = £9,893.55 — fully taxable as earnings. Remaining £40,000 − £9,893.55 = £30,106.45 can shelter within section 401. First £30,000 of that is tax-free; £106.45 is taxable at marginal rate.
NI Treatment Above £30,000
The NI treatment of termination packages has three distinct layers for 2026/27:
| Element | Employee NI (8% / 2%) | Employer NI (15%) |
|---|---|---|
| PENP / PILON amount | Yes — standard Class 1 | Yes — standard Class 1 |
| Termination payment: first £30,000 | No NI | No NI |
| Termination payment: above £30,000 | No employee NI | Yes — employer Class 1A (15%) |
This asymmetry — employer NI but not employee NI above £30,000 — was introduced in April 2020 to align termination payment NI with income tax treatment. From the employee's perspective, avoiding employee NI above £30,000 is a significant benefit; a £50,000 package saves the employee around £1,600 in NI compared with receiving the same amount as salary. The employer, however, pays Class 1A NI on the excess; this is reported on the employer's P11D(b) and paid by 19 July (22 July electronically) following the tax year of payment.
Worked Example: 15 Years Service at £40,000
An employee aged 45, made redundant after 15 years of continuous service in 2026/27 at a salary of £40,000/year (£769/week). They receive:
- Statutory redundancy: 15 years × 1 week (ages 30–44) + 1 year × 1.5 weeks (age 45) = 16.5 weeks × £751 (2026/27 cap) = £12,391.50. However, using actual weekly pay £769 capped at £751. Result: £12,391.50.
- Enhanced (contractual) redundancy: employer pays 1 additional week per year at actual salary: 15 × £769 = £11,538.46.
- Total redundancy element: £12,391.50 + £11,538.46 = £23,929.96.
- 3 months PILON (no notice worked): PENP = (£40,000/12 × 92) / 31 = £9,892.47 — fully taxable as earnings.
- Accrued holiday (5 days): 5/260 × £40,000 = £769.23 — fully taxable as earnings.
The tax calculation for the redundancy element:
- Total termination payments (redundancy only): £23,929.96
- Within £30,000 threshold: yes — fully tax-free
- Taxable termination excess: £nil
- PILON (PENP): £9,892.47 — taxed as earnings at 20% = £1,978.49 income tax; employee NI 8% on amount above personal allowance per-period threshold = approximately £780; employer NI 15% = £1,483.87
- Holiday pay: £769.23 — taxed as earnings
Net to employee from the redundancy element: £23,929.96 tax-free. Net of the PILON (after tax and NI): approximately £7,134. Total net package roughly £31,064 — a significant benefit of keeping the redundancy element within the £30,000 umbrella. Had the employer paid the enhanced redundancy as salary instead of as a termination payment, the same £11,538 would have cost the employee around £3,700 in income tax and NI.
How to Report on SA100 — Page 1 Box 3
If your termination package includes an amount above £30,000 that was taxed by your employer through PAYE, you may still need to include it on a Self Assessment tax return. The relevant field is:
Enter the amount that was subject to income tax above the £30,000 threshold. Your employer should have deducted tax at source via PAYE and the amount should appear on your P45 (if you left in the tax year) or have been included in your P60. The £30,000 tax-free portion should NOT be entered anywhere on the tax return — it is simply excluded.
If your employer incorrectly treated a payment as taxable when it should have been within the £30,000 exemption, you can claim a repayment via your Self Assessment return or by writing to HMRC. Conversely, if your employer incorrectly sheltered a PILON within the £30,000, HMRC may raise an enquiry — the PENP rules mean HMRC can challenge any termination payment structure that appears to underpay tax on the notice element.
Settlement Agreements — Maximising the Tax-Free Element
A settlement agreement is an opportunity to structure the compensation package tax-efficiently within the law. Key principles:
- Separate heads of payment: the agreement should specify exactly what each element represents — statutory redundancy, enhanced redundancy, ex-gratia compensation, holiday pay, PILON etc. A single lump sum without breakdown creates ambiguity that HMRC may challenge.
- Negotiate redundancy vs notice: where you have choice, push more of the package into the redundancy / compensation head (which can shelter in £30,000) rather than PILON (which is fully taxable under PENP). Your employer has no extra NI cost on the portion within £30,000, so this can be a genuine win-win.
- Employer pension contributions: employer pension contributions paid directly into your registered pension at termination are outside the £30,000 calculation entirely under section 408 ITEPA. This is the most powerful planning tool for large packages above £30,000.
- Legal fees: if your employer agrees to pay your legal costs of the settlement, those costs are tax-free under section 413A ITEPA — they are not part of the £30,000 aggregate.
- Benefits continuation: continuation of private medical insurance, car benefit or other BiK after termination during a notice period is taxable as BiK in the normal way — it does not shelter within the £30,000.
Directing Excess Redundancy into a Pension
For redundancy packages above £30,000, the most tax-efficient use of the excess is to direct it into a registered pension. Under section 408 ITEPA 2003, an employer contribution to a registered pension made at the time of termination is exempt from both income tax and NI — it does not count toward the £30,000 cap, and neither employee nor employer NI applies.
Practical constraints:
- The annual allowance cap is £60,000 for 2026/27 — pension contributions in the tax year (including the employer's termination contribution) must not exceed your total UK earnings or £60,000, whichever is lower.
- If you have triggered the money purchase annual allowance (MPAA), the limit is £10,000 for defined contribution.
- The payment must go directly from employer to pension — if the money comes to you first, it becomes a taxable receipt. The employer must make the payment directly.
- Carry-forward rules allow you to use up to three years of unused annual allowance, potentially allowing a larger contribution in the year of redundancy.
For a higher-rate taxpayer receiving £50,000 total (after excluding PILON), the £20,000 above the £30,000 threshold would cost £8,000 in income tax if taken as cash. Paid directly into pension instead: £nil income tax, £nil employee NI. The pension pot then grows tax-free and is drawn down from age 57 (from 2028) with 25% tax-free cash and the balance taxed at retirement marginal rate — often much lower.
5 Common Mistakes That Waste the £30,000 Exemption
- Treating PILON as ex-gratia to shelter it:since April 2018 the PENP formula applies regardless of labelling. Calling notice pay “ex-gratia” does not shelter it. HMRC will calculate the PENP and assess tax accordingly.
- Thinking the £30,000 applies to each payment separately: the exemption is aggregate across all termination payments from the same employer. Statutory redundancy, enhanced redundancy and ex-gratia all count together against one £30,000.
- Failing to direct the excess into pension: a higher-rate taxpayer with a £50,000 package nets only £42,000 cash (after 40% tax on the £20,000 excess). The same £20,000 paid directly to a pension is worth £20,000 in the pot — equivalent to a £33,333 cash salary net of tax. This is one of the largest legal tax savings available in a redundancy situation.
- Not checking the contractual redundancy scheme: many employers (particularly in financial services, public sector and large corporates) have contractual schemes worth significantly more than the statutory formula. Checking the employee handbook, collective agreement or contract before accepting a package can reveal entitlements of 2–4 weeks per year at actual salary with no £751 cap.
- Accepting a PILON when worked notice would be beneficial:if you have 3 months' notice and your employer offers an immediate PILON, the PENP on that 3 months is fully taxable. If instead you work 2 months' notice (or take garden leave), the redundancy payment is paid at the end and the PILON element shrinks to 1 month — keeping more of the total package sheltered within £30,000. This requires negotiation but can save several thousand pounds in tax.