Being made redundant is stressful enough without worrying about tax. Here's exactly what you'll keep.
The £30,000 Tax-Free Rule
The first £30,000 of a redundancy payment is completely tax-free. This applies to statutory redundancy pay, any additional ex-gratia payment from your employer, and enhanced redundancy packages — up to a combined total of £30,000.
What IS Taxable
These parts of your redundancy package ARE taxable as normal income: your final salary and any outstanding pay, holiday pay you've accrued but not taken, payment in lieu of notice (PILON) — unless your contract has a PILON clause, any amount above £30,000, and bonuses or commission earned before redundancy.
Example: £45,000 redundancy package
Statutory redundancy: £8,000 (tax-free ✓)
Enhanced redundancy: £22,000 (tax-free ✓)
Total under £30k threshold: £30,000
Remaining £15,000: taxed as income
Outstanding holiday pay: £2,000 (taxed as income)
Tax-free: £30,000
Taxable: £17,000
Statutory Redundancy Calculation
You get 0.5 weeks' pay per year of service (under 22), 1 week per year (22-40), or 1.5 weeks per year (41+). Weekly pay is capped at £700, and maximum service counted is 20 years. Use our redundancy calculator for your exact figure.
Can You Reduce the Tax?
Ask your employer to pay the taxable amount directly into your pension. Employer pension contributions don't count towards the £30,000 limit AND they're not subject to income tax or NI. This can save you thousands.
Tax Rules for Redundancy Payments
The first £30,000 of statutory redundancy pay is tax-free — this is one of the most valuable tax exemptions in UK employment law. Any amount above £30,000 is taxed as earnings at your marginal rate. Importantly, this £30,000 exemption applies to the total redundancy package, not just statutory redundancy. Contractual redundancy, enhanced packages, and ex-gratia payments all count toward the same £30,000 threshold.
Your final salary payment, accrued holiday pay, and any payment in lieu of notice (PILON) are always fully taxable — they do not count toward the £30,000 tax-free allowance. Many employees are surprised when their "redundancy" payment is heavily taxed, not realising that only the genuine redundancy element qualifies for the exemption. Check your redundancy pay entitlement to understand exactly what you are owed.
If you receive a large redundancy payment, consider directing some into your pension via a salary sacrifice arrangement before your employment ends. Employer pension contributions from redundancy payments are not subject to income tax or National Insurance, making this one of the most tax-efficient strategies available. See our pension guide for more details.
Calculate your redundancy pay
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