The first £30,000 of a genuine redundancy payment is tax-free, and you pay no National Insurance on a redundancy payment. Anything above £30,000 is taxed at your normal income tax rate. Pay in lieu of notice (PILON) is always fully taxable and does not count towards the £30,000.
Key points
✓First £30,000 of a genuine redundancy payment is tax-free
✓You pay no National Insurance on a redundancy payment, even above £30,000
✓Amounts over £30,000 taxed at your marginal rate (20%, 40% or 45%) outside Scotland
✓PILON and holiday pay are always fully taxable, they don't count toward the £30,000
✓For Universal Credit you must have £16,000 or less in savings, and over £6,000 reduces your payment
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 you pay no National Insurance on it.
✓Yes: The £30,000 is a single limit, not a fresh £30,000 each tax year: payments received in earlier tax years use it up first
✓Yes: Both statutory redundancy pay and enhanced redundancy pay count toward the £30,000
✓Yes: You pay no National Insurance on a redundancy payment, including amounts over £30,000
✓Yes: The £30,000 is counted across all your termination payments and benefits from the same employment, from different jobs with the same employer, and from associated employers, including any received in an earlier tax year
✗No: Anything above £30,000 is taxed as income at your marginal rate (20%, 40%, or 45%) outside Scotland
Your employer pays Class 1A National Insurance on termination awards above £30,000, through PAYE.
Example: If you receive £45,000 in redundancy pay, the first £30,000 is tax-free. The remaining £15,000 is taxable income. If you're a basic rate taxpayer, you'd pay 20% on £15,000 = £3,000 in tax. You pay no NI on any of it.
What counts toward the £30,000 limit?
A single leaving payment is often made up of more than one element, for example redundancy pay, accrued holiday pay and a payment in lieu of notice. HMRC's guidance for employers says each element must be considered separately.
These payments count toward the £30,000 tax-free limit:
✓Yes: Statutory redundancy pay (the legal minimum based on age and years of service)
✓Yes: Enhanced (ex-gratia) redundancy pay above the statutory minimum
✓Yes: Compensation for loss of office or loss of employment (HMRC checks what the payment is really for)
✓Yes: Some payments under a settlement agreement specifically for termination
HMRC looks at each element of a termination package separately. A settlement agreement can include parts that are earnings, such as unpaid wages or a bonus, and those are taxed in the ordinary way instead. A few redundancy schemes approved under section 157 of the Employment Rights Act 1996 (known as approved contractual payments) are also different: the part above what statutory redundancy pay would have been is liable to income tax, generally as earnings.
These payments do NOT count toward the £30,000 and are always taxable:
✗No: Payment in lieu of notice (PILON), always taxable since April 2018
✗No: Holiday pay owed to you for leave you built up but did not take (accrued holiday pay)
✗No: Bonuses earned before termination
✗No: Wages for the notice period (if you work it)
✗No: Any payment specifically for agreeing not to work for a competitor (restrictive covenant payments)
HMRC treats accrued holiday pay and bonuses as earnings, taxed in the ordinary way. HMRC's guidance for employers also tells them to work out National Insurance contributions on accrued holiday pay paid when an employee leaves.
PILON is always fully taxable. Since 6 April 2018, all payments in lieu of notice are treated as earnings and subject to full income tax and National Insurance, regardless of whether your contract included a PILON clause. HMRC's guidance for employers says to include a payment in lieu of notice in gross pay for both PAYE and National Insurance contributions. For how notice and PILON work, see our notice periods guide. A payment under a settlement agreement is split into its elements in the same way.
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.
✓Yes: Statutory redundancy pay is always below £30,000, the maximum statutory amount is £22,530 (2026/27, based on a weekly cap of £751 and maximum 30 weeks' pay)
✓Yes: So statutory redundancy pay alone is always entirely tax-free
✓Yes: If your employer also pays enhanced redundancy pay, the statutory and enhanced payments are added together and the total can be more than £30,000
The statutory redundancy calculation is: 0.5 week's pay per year of service under age 22 + 1 week's pay per year aged 22 to 40 + 1.5 week's pay per year aged 41+. Weekly pay is capped at £751 (2026/27) and service is capped at 20 years, giving a maximum of £22,530.
HMRC's Employment Income Manual says redundancies can also be voluntary. The test it gives is that the total number of redundancies matches the reduced need for employees. GOV.UK says it is up to your employer whether they select you if you volunteer for redundancy.
✓Yes: A statutory or non-statutory redundancy payment is charged to tax under section 401 of the Income Tax (Earnings and Pensions) Act 2003, so the £30,000 threshold in section 403 applies to it
✓Yes: Any package made at the time of redundancy is divided into its elements, so a payment in lieu of notice or holiday pay in the package is dealt with as its own element
✗No: Any amount above £30,000 is taxed as income in the normal way
NHS redundancy pay, is it tax-free?
Section 401 of the Income Tax (Earnings and Pensions) Act 2003 applies to payments received in connection with the termination of a person's employment, so the £30,000 threshold in section 403 applies to an NHS redundancy payment. This guide does not cover how an NHS redundancy payment is worked out.
✓Yes: The first £30,000 of the total redundancy payment (excluding PILON and holiday pay) is tax-free
✗No: If your NHS redundancy package exceeds £30,000, income tax (but you pay no NI) applies to the excess
How is tax deducted from redundancy pay?
Here is how HMRC's guidance for employers says the tax is handled:
1
Your employer works out each element separately
HMRC's guidance for employers says to decide the tax and National Insurance rules for each element of the payment, then add the separate results together. For PAYE, a redundancy payment is taxable only on amounts over £30,000. PILON and holiday pay are always treated separately as taxable.
2
Tax is deducted through PAYE
If the payment is made when or before you leave, your employer includes the taxable amount in your gross pay and operates PAYE in the normal way. If you are on the wrong tax code, you may pay too much or too little tax, and you can get a refund or pay the tax you owe once HMRC has your income details for the tax year.
3
Payments made after you leave
If the payment is made after you leave, HMRC's guidance for employers says to use tax code 0T and to give you a letter showing the date of the payment, the gross amount and the PAYE tax deducted.
4
Tax return and refunds
GOV.UK says you must send a Self Assessment tax return if HMRC asks you to. GOV.UK also says you might be able to claim back some Income Tax if you have had your final pay from your employer, you are not getting a pension from your employer, you are not getting taxable benefits and you have not started a new job.
If you are paid in instalments, HMRC's guidance for employers says the £30,000 exemption does not only apply to the tax year in which your employment ends: any unused balance can be carried forward to set against payments in a later year.
Is redundancy pay taxed differently in Scotland?
The £30,000 tax-free limit is the same in Scotland. What changes is the rate on anything above it: if you live in Scotland, the excess is taxed at Scottish Income Tax rates, which run from 19% to 48%, instead of 20%, 40% and 45%.
Scottish band
Taxable income
Rate
Starter rate
£12,571 to £16,537
19%
Basic rate
£16,538 to £29,526
20%
Intermediate rate
£29,527 to £43,662
21%
Higher rate
£43,663 to £75,000
42%
Advanced rate
£75,001 to £125,140
45%
Top rate
over £125,140
48%
These are the 2026 to 2027 Scottish rates for someone with a standard Personal Allowance of £12,570. The Scottish rates apply to your wages, pension and most other taxable income.
Does redundancy pay affect Universal Credit or other benefits?
If you get Universal Credit (UC), GOV.UK says you must report that you have lost your job and declare any redundancy pay you get.
✓Yes: To claim UC you must have £16,000 or less in money, savings and investments
✓Yes: GOV.UK says that if you have lost your job, including through voluntary redundancy, you might be able to get New Style Jobseeker's Allowance or New Style Employment and Support Allowance, which depend on your National Insurance contributions, and your savings and your partner's income do not affect how much you get
✗No: If you have over £6,000 in money, savings and investments, your UC payment is reduced by £4.35 for every £250 between £6,000 and £16,000
✗No: More than £16,000 in money, savings and investments: you do not meet the savings condition for UC
Tell the DWP about redundancy pay. If you get Universal Credit you must declare any redundancy pay you get. The GOV.UK guidance does not say how a redundancy payment is counted for Universal Credit, so ask the DWP how it affects your claim. Our Universal Credit guide explains the rest of the claim.
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 you still pay no National Insurance. 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. You do not pay National Insurance on redundancy payments, including any amounts above the £30,000 tax-free limit. Your employer pays Class 1A National Insurance on termination awards above £30,000. 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. HMRC's guidance for employers says to include a payment in lieu of notice in gross pay for both PAYE and National Insurance contributions. 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 in total, set by section 403 of the Income Tax (Earnings and Pensions) Act 2003, not £30,000 per redundancy: section 404 adds together payments for the same employment, different employments with the same employer, and associated employers, and sets the £30,000 against earlier tax years first. Statutory redundancy pay alone will always be below £30,000 (the maximum statutory amount for 2026/27 is £22,530).
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. You pay no National Insurance on any of the £50,000.
Know Your Rights UK. "Is Redundancy Pay Taxable? The Complete UK Guide." Know Your Rights UK, https://www.knowyourrightsuk.com/employment/redundancy-pay-tax