Being made redundant is stressful enough without worrying about how much of your payout goes to HMRC. The good news: the first £30,000 of a genuine redundancy payment is completely tax-free in 26-27. This guide explains how the exemption works, what is and is not covered, and how to calculate what you actually keep. Understanding the rules can save you thousands — particularly if your total package exceeds the exemption and you have options about how it is structured.[1]
How does the £30,000 tax-free exemption work?
The first £30,000 of a redundancy payment (statutory or enhanced) is exempt from both income tax and National Insurance. This applies whether you are made compulsorily redundant or accept voluntary redundancy — the key requirement is that it is a genuine redundancy (i.e., your role is being eliminated, not that you are being dismissed for other reasons). The exemption is per employment, not per year, so multiple small redundancy payments from the same employer in different years still share a single £30,000 limit.
Anything above £30,000 is added to your taxable income for the year and taxed at your marginal rate. If you earn £40,000 during the year before redundancy and receive £50,000 in redundancy pay, the taxable portion is £20,000 (the excess over £30,000). This is added to your £40,000 salary, giving total taxable income of £60,000. You would pay 40% on the portion above £50,270.
Use the calculator at £60,000 to see what the tax looks like on that combined income.
What counts towards the £30,000?
The following payments all qualify for the tax-free exemption and are counted together against the £30,000 limit:
- Statutory redundancy pay — calculated based on your age, length of service, and weekly pay (capped at £700/week in 26-27). Always falls within the exemption for most employees.
- Enhanced/contractual redundancy — any additional amount your employer pays above the statutory minimum, whether specified in your contract or offered as a one-off.
- Ex-gratia payments — one-off payments in recognition of service that are genuinely linked to the termination of employment.
- Damages for loss of employment — genuine compensation for loss of office, including settlement agreement payments.
What does NOT count and is always taxable?
These payments are taxed as normal earnings regardless of the redundancy. They do not benefit from the £30,000 exemption and have full income tax and NI deducted:
- Pay in lieu of notice (PILON) — taxed as earnings whether contractual or not. Since April 2018, all PILON is taxable even if your contract does not specifically include a PILON clause.
- Holiday pay owed — accrued but untaken holiday is paid as normal salary with full deductions.
- Bonus payments — any bonus earned before termination is taxed as earnings in the normal way.
- Restrictive covenant payments — payments for agreeing not to work for a competitor are fully taxable as earnings.
PILON is the most common source of confusion. If your contract includes a three-month notice period and your employer pays you a lump sum instead of making you work it, that entire three months' salary is taxed as normal earnings with income tax at 20%/40% and NI at 8%. This can be a significant portion of your total package and catches many people off guard.
How is National Insurance applied to redundancy?
The tax-free £30,000 is also exempt from employee NI contributions. You pay no employee NI on the first £30,000 of genuine redundancy pay. However, any amount above £30,000 is subject to employer NI (Class 1A) at 13.8% — but crucially, not employee NI. This is unusual: you pay income tax on the excess but your employer bears the NI cost rather than deducting it from your payment.[2]
This means the excess above £30,000 is better than normal salary from a NI perspective — you save 8% employee NI on it compared to receiving the same amount as salary. Your employer, however, still pays their NI, which is why some employers prefer to structure payments as pension contributions instead.
How is redundancy tax calculated in practice?
Your employer will separate the redundancy payment into taxable and non-taxable elements on your P45. The taxable portion is added to your cumulative earnings for the year. If the redundancy pushes you from the basic rate band (up to £50,270) into the higher rate band, only the portion that exceeds £50,270 is taxed at 40%. PAYE is applied based on your tax code and year-to-date position — you will not always owe additional tax at year end.
Example: you earned £30,000 before redundancy and receive a £50,000 package (£5,000 PILON + £45,000 redundancy). The PILON (£5,000) is taxed as earnings. Of the £45,000 redundancy, the first £30,000 is tax-free and £15,000 is taxable. Total taxable income: £30,000 + £5,000 + £15,000 = £50,000. After the Personal Allowance of £12,579, you pay 20% on income up to £50,270.
How can I reduce the tax bill on my redundancy?
There are legitimate strategies to minimise the tax on redundancy pay above the £30,000 exemption:
- Ask your employer to pay the excess into your pension — employer pension contributions from redundancy payments are not subject to income tax or NI (up to the Annual Allowance of £60,000). This is the single most effective strategy and can save you 40% or more on every pound redirected. Your employer saves NI too, so they should be receptive to this request.
- Timing across tax years — if you are made redundant near the end of a tax year (before 5 April), you may be able to negotiate splitting the payment so part falls in the new tax year. This can keep you in a lower bracket in both years, reducing the overall tax paid.
- Negotiate the structure — if your total package includes elements like garden leave, PILON, and redundancy, the classification matters. Ask whether any amounts can be structured as genuine ex-gratia payments rather than contractual entitlements (though HMRC will challenge artificial arrangements).
What about statutory redundancy pay specifically?
Statutory redundancy pay is calculated using a formula based on your age, length of service, and weekly pay (capped at £700/week for 26-27). The maximum statutory redundancy is 30 weeks × £700 = £21,000. This always falls within the £30,000 exemption, so statutory redundancy alone is always completely tax-free. The exemption becomes relevant when you receive enhanced redundancy on top of the statutory amount and the combined total exceeds £30,000.
Your years of service determine the multiplier: half a week's pay for each year under 22, one week for each year aged 22–40, and 1.5 weeks for each year aged 41+. The maximum service counted is 20 years.
How do I estimate my total take-home from redundancy?
Use the income tax calculator to model your total income for the year including the taxable portion of your redundancy. Enter your total taxable income (salary earned so far + PILON + any redundancy above £30,000) as your gross income. This will show you the marginal rate applied and your overall take-home position. Remember that the £30,000 tax-free portion is not entered — only include the taxable amounts.
If you are also considering how to invest or save your redundancy payment, see our guides on Lifetime ISAs and pension contributions for tax relief.
Sources
- HMRC — Redundancy: your rights — tax and National Insurance. Confirms the £30,000 tax-free exemption on genuine redundancy payments. Accessed July 2026.
- HMRC — Income Tax rates and Personal Allowances. Rates for 26-27: basic 20%, higher 40%, additional 45%. Personal Allowance £12,579. Accessed July 2026.
- HMRC — National Insurance rates and categories. Employee NI rate 8% on earnings between the Primary Threshold and Upper Earnings Limit. Accessed July 2026.