Is Redundancy Pay Taxable? The Complete UK Guide
The short answer: the first £30,000 of your redundancy payment is tax-free. Anything above that is subject to income tax — but not National Insurance. This guide explains exactly what counts toward the £30,000 limit, how PILON (payment in lieu of notice) is treated, and how to work out what you'll actually receive.
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The £30,000 tax-free limit — how it works
Under UK tax law, the first £30,000 of a genuine redundancy payment is completely tax-free and exempt from National Insurance contributions.
- ✓The £30,000 limit applies per redundancy event — not per tax year
- ✓Both statutory redundancy pay and enhanced redundancy pay count toward the £30,000
- ✓Anything above £30,000 is taxed as income at your marginal rate (20%, 40%, or 45%)
- ✓No National Insurance is charged on any redundancy payment — including amounts over £30,000
- ✓The £30,000 limit has not changed since 1988 — it is not index-linked
What counts toward the £30,000 limit?
Not everything your employer pays when you leave counts as "redundancy pay" for tax purposes. HMRC distinguishes between payments that are part of the termination package and those that are really just delayed wages.
These payments count toward the £30,000 tax-free limit:
- ✓Statutory redundancy pay (the legal minimum based on age and years of service)
- ✓Enhanced (ex-gratia) redundancy pay above the statutory minimum
- ✓Payments for loss of office or loss of employment
- ✓Some payments under a settlement agreement specifically for termination
These payments do NOT count toward the £30,000 and are always taxable:
- ✓Payment in lieu of notice (PILON) — always taxable since April 2018
- ✓Holiday pay owed to you
- ✓Bonuses earned before termination
- ✓Wages for the notice period (if you work it)
- ✓Any payment specifically for agreeing not to work for a competitor (restrictive covenant payments)
Is statutory redundancy pay taxable?
Statutory redundancy pay is tax-free, as long as the total of all your redundancy-related payments (excluding PILON and holiday pay) stays below £30,000.
- ✓Statutory redundancy pay is always below £30,000 — the maximum statutory amount is capped (£21,000 for 2024/25, based on a weekly cap of £700 and maximum 30 weeks)
- ✓So statutory redundancy pay alone is always entirely tax-free
- ✓If your employer also pays enhanced redundancy pay on top, the combined total might exceed £30,000
Is voluntary redundancy pay taxable?
Voluntary redundancy pay is treated exactly the same as compulsory redundancy pay for tax purposes — the first £30,000 is tax-free.
- ✓Choosing to take voluntary redundancy does not change the tax treatment
- ✓Your employer may offer a higher payment for volunteers — but the same £30,000 limit applies
- ✓PILON remains fully taxable whether the redundancy is voluntary or compulsory
- ✓Any amount above £30,000 is taxed as income in the normal way
NHS redundancy pay — is it tax-free?
NHS redundancy payments follow the same UK-wide rules — the first £30,000 is tax-free. However, NHS redundancy packages are often significantly higher than statutory minimums.
- ✓NHS redundancy pay is calculated under NHS terms and conditions — typically more generous than statutory
- ✓The first £30,000 of the total redundancy payment (excluding PILON and holiday pay) is tax-free
- ✓If your NHS redundancy package exceeds £30,000, income tax (but not NI) applies to the excess
- ✓NHS staff who are re-employed by the NHS within 4 weeks may have to repay the redundancy payment
How is tax deducted from redundancy pay?
Your employer is responsible for deducting the correct amount of tax before paying you. Here is how it typically works:
Does redundancy pay affect Universal Credit or other benefits?
Redundancy pay can affect your Universal Credit (UC) claim in two ways:
- ✓Redundancy pay counts as capital (savings) for UC purposes — not as earnings
- ✓Capital under £6,000 is ignored; between £6,000 and £16,000 a tariff income is assumed; above £16,000 you cannot claim UC
- ✓The capital rules apply from the month you receive the payment
- ✓PILON may be treated as earnings for the period it covers, potentially delaying your UC claim
- ✓Once the capital falls below the threshold (e.g. you spend it on living costs), you can reclaim
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Frequently asked questions
Is redundancy pay tax-free in the UK?
Yes — the first £30,000 of a genuine redundancy payment is completely tax-free and exempt from National Insurance. Any amount above £30,000 is subject to income tax at your normal rate, but still no National Insurance applies. Payments in lieu of notice (PILON) and holiday pay are always fully taxable, regardless of the £30,000 rule.
Do I pay National Insurance on redundancy pay?
No. National Insurance is not charged on redundancy payments — including any amounts above the £30,000 tax-free limit. However, PILON (payment in lieu of notice) is treated as earnings and is subject to both income tax and National Insurance in full.
Is PILON (payment in lieu of notice) taxable?
Yes — PILON is always fully taxable since April 2018, regardless of whether your contract included a PILON clause. Your employer must deduct income tax and National Insurance from any PILON before paying it to you. PILON does not count toward the £30,000 tax-free redundancy limit.
What is the maximum tax-free redundancy pay in the UK?
The tax-free limit is £30,000 per redundancy. This has been the limit since 1988 and is not linked to inflation. Statutory redundancy pay alone will always be below £30,000 (the maximum statutory amount for 2024/25 is around £21,000). It is enhanced (additional) redundancy pay that is most likely to push you over the £30,000 threshold.
How much tax will I pay on a £50,000 redundancy payment?
If the £50,000 is genuine redundancy pay (excluding PILON), the first £30,000 is tax-free. The remaining £20,000 is taxable income. A basic rate taxpayer would pay 20% on £20,000 = £4,000 in tax. A higher rate taxpayer would pay 40% on £20,000 = £8,000. No National Insurance is charged on any of the £50,000.