How Much of a Redundancy Payment is Tax Free?

Redundancy is rarely welcome news. But understanding how your redundancy payment is taxed, and how much you’re entitled to keep tax-free, can make a meaningful difference to your financial position when it matters most.

The short answer: up to £30,000 of a genuine redundancy payment is tax-free. Everything above that threshold is subject to income tax and, in some cases, National Insurance contributions. Here’s what you need to know.

The £30,000 tax-free threshold

Regardless of whether you receive the legal minimum (statutory redundancy pay) or a more generous amount negotiated with your employer, the first £30,000 of a genuine redundancy payment is free from income tax and National Insurance contributions.

This threshold applies per redundancy, not per tax year. So if you’re made redundant, you have a fresh £30,000 allowance regardless of what you’ve earned or received elsewhere that year.

Any amount above £30,000 is taxable as income. It’s added to your other earnings for the tax year and taxed at your marginal rate: 20%, 40%, or 45% depending on your total income. Employer National Insurance contributions (at 13.8%) also apply to the excess above £30,000, though employees themselves do not pay National Insurance on redundancy payments.

It’s worth noting that not all payments made when employment ends qualify as genuine redundancy payments. Payments in lieu of notice (PILON), accrued holiday pay, and bonuses owed are treated as regular earnings and are fully taxable from the first pound, the £30,000 exemption does not apply to these.

What is statutory redundancy pay?

Statutory redundancy pay is the legal minimum your employer must pay if you’re made redundant. To qualify, you must have been continuously employed for at least two years.

The amount you receive is calculated based on your age and length of service:

Under 22: half a week’s pay for each full year of service
Aged 22 to 40: one week’s pay for each full year of service
Aged 41 and over: one and a half weeks’ pay for each full year of service

Weekly pay is capped, for the 2025/26 tax year, this sits at £751 per week, and a maximum of 20 years of service is counted. This puts the maximum statutory redundancy payment for 2025/26 at £22,530, with slightly higher limits in Northern Ireland.

The weekly pay cap is reviewed each April, so it’s worth checking the current figure on GOV.UK to make sure any calculation you’ve been given reflects the latest limits.

For employees on a fixed salary, a week’s pay is their gross weekly wage. For those with variable hours or pay, it’s calculated as an average of earnings over the 12 weeks prior to the redundancy notice. Non-contractual overtime, commission, and bonuses are generally excluded unless they form part of normal contractual pay.

When are you entitled to redundancy pay?

To qualify for statutory redundancy pay, you must have been employed continuously for at least two years, dismissed by reason of redundancy rather than misconduct or resignation, and be classed as an employee rather than a worker or self-employed contractor.

Entitlement can be lost in certain circumstances. If your employer offers to retain you in your current role, or proposes suitable alternative employment, and you refuse without reasonable grounds, you may forfeit your right to statutory redundancy pay. What counts as “suitable” isn’t always obvious, a role with significantly different pay, hours, or location may not qualify, so if you’re unsure, take advice before making a decision. There is also a four-week trial period for any alternative role, during which you can still claim redundancy pay if you reasonably decide the role isn’t suitable.

Enhanced redundancy pay

Statutory redundancy pay is the floor, not the ceiling. Many employers offer more generous packages, either through company policy or negotiation. This might mean a higher weekly pay figure (uncapped, rather than limited to £751), a longer service period taken into account, or an additional ex gratia payment on top.

The £30,000 tax-free threshold applies to the combined total of all genuine redundancy and ex gratia payments, not to each element separately. So if you receive £20,000 in redundancy pay and a £15,000 ex gratia payment, only £30,000 of the combined £35,000 is tax-free; the remaining £5,000 is taxable.

If your employment contract sets out a specific redundancy formula, your employer is contractually obliged to honour it. Enhanced contractual terms aren’t discretionary, they’re legally enforceable.

Does redundancy pay affect benefits or pension contributions?

Redundancy pay is generally treated as capital rather than income for Universal Credit purposes. This means a lump sum could affect your eligibility if it pushes your savings above the £16,000 capital limit, something worth factoring in before you receive payment if you’re likely to need to claim.

On pensions, you cannot pay redundancy pay directly into a pension and receive tax relief, as it’s not classed as “relevant UK earnings.” However, if you have other earned income in the same tax year, you could direct that income into your pension instead, using the redundancy payment to cover living costs while benefiting from pension tax relief on your earned income.

Key things to check if you’re facing redundancy

Verify the calculation: Ask your employer for a written breakdown: check the weekly pay figure, years of service, and age multipliers.
Check your contract: You may be entitled to more than the statutory minimum. Enhanced contractual terms are legally binding.
Understand your final pay: Ask for each element to be itemised: redundancy pay, notice pay, holiday pay, and any other amounts should be clearly separated.
Consider the timing: If your payment pushes your income significantly higher in one tax year, an accountant may be able to help you manage the tax impact.
Take professional advice: If your payment exceeds £30,000, or your situation involves settlement agreements, share options, or PILON, it’s worth speaking to an accountant before you accept anything.