Is redundancy pay taxable?
Mostly no, up to a point — but the parts of your package that fall outside the exemption catch a lot of people out.
The short answer
Genuine redundancy payments are free of income tax and National Insurance up to £30,000.00. Statutory redundancy pay is always within that. The complication is that a redundancy package is rarely just redundancy pay — and the other components are taxed as normal earnings from the first pound.
Counts towards the £30,000.00
- ✓Statutory redundancy pay
- ✓Contractual or enhanced redundancy pay
- ✓Ex-gratia and compensation payments
- ✓Certain payments for injury or disability
Always taxed as earnings
- ×Payment in lieu of notice (PILON)
- ×Accrued but untaken holiday pay
- ×Outstanding salary, overtime and bonuses
- ×Anything above the £30,000 threshold
A worked example
Someone offered a £45,000 package made up of £18,000 statutory and enhanced redundancy pay, £15,000 ex-gratia, £9,000 PILON and £3,000 holiday pay:
| Element | Amount | Treatment |
|---|---|---|
| Redundancy pay | £18,000 | Tax free |
| Ex-gratia | £15,000 | £12,000 tax free, £3,000 taxable |
| PILON | £9,000 | Fully taxable + NI |
| Holiday pay | £3,000 | Fully taxable + NI |
Check your own numbers
The tax calculator applies the exemption to the right elements and estimates what you will actually receive.
Common questions
Is redundancy pay taxable?
Statutory redundancy pay is not taxable. More broadly, the first £30,000.00 of a termination package is free of income tax and National Insurance. Anything above £30,000.00 is subject to income tax, and certain elements are taxable from the first pound regardless.
Do you pay 40% tax on redundancy?
Only on the taxable part, and only if that pushes your total income for the year into the higher rate band. The tax-free element is ignored entirely. Because a redundancy payment often arrives partway through a tax year, people frequently overpay through PAYE and can reclaim it from HMRC afterwards.
Do I pay National Insurance on redundancy pay?
Not on the genuine redundancy element, even the part above the threshold — that is subject to income tax but not employee National Insurance. Payments in lieu of notice, holiday pay and outstanding salary are ordinary earnings and do attract National Insurance.
Is payment in lieu of notice taxable?
Yes, in full. Since April 2018 all PILON is treated as earnings under the post-employment notice pay rules, whether or not your contract contains a PILON clause. It does not use any of the £30,000 exemption.