Is redundancy pay taxed?
Reviewed by Quality and Service Manager, Edward Waine ATT
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£30,000 tax-free allowance: Statutory and qualifying enhanced redundancy payouts are tax-free up to £30,000; any amount above £30,000 is subject to Income Tax but remains exempt from National Insurance.
Notice and holiday pay are fully taxed: Payments in Lieu of Notice (PILON), accrued holiday pay, and outstanding bonuses do not count toward the £30,000 tax-free limit and are taxed as regular employment income.
Emergency tax creates refund opportunities: Taxable redundancy payments made after your P45 is issued trigger an emergency 0T tax code, often causing heavy overpayments that can be reclaimed from HMRC.
A common question many people have is: is redundancy pay taxed? And given how confusing it all is, we’re not surprised. Losing a job because of redundancy can be tough, but having to figure out the ins and outs of redundancy pay makes it all the more overwhelming.
The good news is that UK law allows some redundancy payments to be tax-free, but there are some rules you need to be aware of. Let’s explore how redundancy works, what tax applies, and how to check if you’re owed a refund.
What is redundancy pay?
Redundancy pay is a financial cushion for employees who lose their job because the role is no longer needed. It’s designed to support workers while they look for new employment.
There are two main types of redundancy pay:
Statutory redundancy pay: The minimum amount employers must pay if you’ve worked for them for at least two years.
Enhanced redundancy pay: Some employers offer additional payments beyond the statutory amount, based on contracts or company policies.
"Navigating redundancy is stressful enough without having HMRC take an extra slice of your payout by mistake. The key thing to remember is that while wages and notice pay are taxed as normal, your actual redundancy compensation is completely tax-free up to £30,000. If an emergency 0T code was applied to your payment, you're almost certainly due a tax refund." - Edward Waine ATT, RIFT Quality & Service Manager
Who is eligible for redundancy pay?
To qualify for statutory redundancy pay in the UK, you must:
Have worked for your employer for at least two years.
Be classed as an employee (not self-employed or a contractor).
Be made redundant (not dismissed for misconduct or other reasons).
The amount you’ll receive depends on your age, salary, and length of employment. You can use the UK Government’s redundancy pay calculator for an estimate of what you’re entitled to.
Is redundancy pay taxed?
The UK tax system treats redundancy pay differently from regular wages. Some redundancy payments are tax-free, while others may be subject to deductions.
Up to £30,000 of redundancy pay is tax-free. You won’t pay Income Tax or National Insurance on this portion.
Any amount over £30,000 is taxed. This is treated as earnings and taxed at your normal income tax rate.
National Insurance contributions (NICs) do not apply to redundancy pay, even on amounts above £30,000.
🧾 Did you know? Millions of pounds in overpaid tax are held by HMRC following redundancy payouts each year. Because employers must apply an emergency 0T tax code on a week 1/month 1 basis to any taxable payments made after issuing a P45, thousands of service leavers and employees are taxed as if they earn that high payout every single month.
What counts toward the £30,000 tax-free limit?
Certain payments qualify for the £30,000 tax-free allowance:
Statutory redundancy pay: The legal minimum redundancy payment.
Compensation for loss of employment: If it’s genuinely compensation and not linked to your contract.
However, some payments do not count towards the tax-free allowance and are taxed as income:
Accrued holiday pay: Any untaken holiday you’re paid for is taxed like wages.
Payments in lieu of notice (PILON): If your employer pays you instead of making you work your notice period, this is taxable.
Bonuses or commission owed: If you’re due extra earnings when you leave, these are taxed as normal pay.
Enhanced redundancy pay: how is it taxed?
If your employer offers an enhanced redundancy package (above the statutory amount), the tax-free threshold still applies.
For example:
If your total redundancy package is £28,000, you receive it all tax-free.
If you receive £50,000, the first £30,000 is tax-free, and the remaining £20,000 is taxed as income.
Tax implications for other payments related to redundancy
Certain payments made alongside redundancy pay are taxed differently:
Accrued holiday pay – Fully taxable and subject to National Insurance.
Payments in lieu of notice (PILON) – Usually taxable, depending on contract terms.
Ex-gratia payments – If not contractually owed, they may qualify for the £30,000 tax exemption.
💡 RIFT Recommends: Review your final payslip breakdown carefully to make sure your employer doesn't lump your statutory redundancy pay in with accrued holiday pay or notice pay. Keeping qualifying redundancy compensation listed as a separate line item ensures the full £30,000 tax-free threshold is applied correctly.
How is tax deducted on redundancy pay above £30,000?
If your redundancy fee exceeds £30,000, your employer deducts tax via Pay As you Earn (PAYE) before paying you.
Example tax calculation
If you receive a redundancy payment of £40,000:
£30,000 is tax-free.
£10,000 is taxed at your Income Tax rate (e.g., 20% if you're a basic-rate taxpayer, 40% if you’re a higher-rate taxpayer).
You receive £8,000 after tax on the additional £10,000 (if taxed at 20%).
You can check your payslip or ask your employer for a breakdown of deductions.
Tax Treatment of Redundancy Payout Components
Payment Component | Tax-Free Limit | Income Tax Status | National Insurance (NI) Status |
|---|---|---|---|
Statutory Redundancy Pay | First £30,000 (combined) | Tax-free up to £30,000; excess taxed at marginal rate | Exempt (even on amounts over £30,000) |
Enhanced Severance / Ex-Gratia | First £30,000 (combined) | Tax-free up to £30,000; excess taxed at marginal rate | Exempt for employees |
Payment in Lieu of Notice (PILON) | £0 (Fully taxable) | Taxed in full as regular salary | Standard Class 1 NI applies |
Accrued Holiday Pay & Bonuses | £0 (Fully taxable) | Taxed in full as regular salary | Standard Class 1 NI applies |
How to claim a refund on overpaid tax for redundancy pay
Sometimes, too much tax is deducted from redundancy payments. This can happen if:
Your employer incorrectly classifies part of your payment.
You were placed on an emergency tax code.
You had no further income after redundancy, meaning tax was over-calculated.
Tax refund: next steps
Check your final payslip and P45 to see how much tax was deducted.
Use your HMRC Personal Tax Account to check your tax position.
Submit a tax refund claim to HMRC if you think you’ve overpaid. You can do this online or by post.
💡 RIFT Recommends: Use Form P50 if you don't start a new job within 4 weeks. If you are made redundant partway through the tax year and remain unemployed for at least four weeks (without claiming taxable benefits like Jobseeker's Allowance), submit Form P50 to HMRC alongside your P45 to claim back your overpaid tax immediately rather than waiting for the tax year to end.
Understanding redundancy tax rules can be complicated, but you don’t have to figure it out alone. If you think you’ve paid too much tax on redundancy pay, RIFT Refunds can help you check and claim back what’s yours.
Get expert tax advice today and make sure you’re not paying more tax than you need to.
