Tax on Redundancy Payout
Estimate income tax on your redundancy package components. The first £30,000 of statutory redundancy and ex-gratia payments is typically tax-free
Understanding the £30,000 Tax-Free Allowance
When you receive a redundancy payment, not all of it is subject to income tax. UK law provides a £30,000 tax-free allowance specifically for redundancy payments, which can significantly impact how much you actually receive after tax.
Tax-Free Components
- ✓Statutory redundancy pay (up to £30,000 combined total)
- ✓Ex-gratia payments (up to £30,000 combined total)
- ✓The £30,000 applies to the combined total of statutory and ex-gratia payments
Always Taxable
- ✗Payment in Lieu of Notice (PILON) - taxed as normal earnings
- ✗Accrued holiday pay - taxed as normal earnings
- ✗Any amount over £30,000 from redundancy/ex-gratia payments
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Real-World Example Scenarios
Small Redundancy Package (Under £30,000)
Sarah receives a total package of £15,000
Result: Most of Sarah's package is tax-free because the combined redundancy payments are under £30,000.
Large Package (Over £30,000)
James receives a generous package totaling £50,000
Result: The £10,000 over the £30,000 threshold becomes taxable, along with PILON and holiday pay.
National Insurance Contributions
The tax treatment for National Insurance differs from income tax on redundancy payments:
- ✓No NI on statutory redundancy pay regardless of amount
- ✓No NI on ex-gratia payments regardless of amount
- ✗NI is payable on PILON and holiday pay as normal earnings
Tax Codes and P45
Understanding your tax documentation after redundancy is important:
Your employer must provide a P45 showing all payments and tax deducted. Keep this safe as you'll need it for your next employer or to claim benefits.
Large redundancy payments may trigger emergency tax rates. You can reclaim overpaid tax through a P50 form if you're not working, or it will adjust through your new employer.
If your total income (including redundancy) exceeds £100,000, you may need to complete a self-assessment tax return.
Common Tax Questions
Can I claim a tax refund?
Yes, if too much tax was deducted from your redundancy payment. Complete a P50 form if you're not working again in the same tax year, or wait until year-end when HMRC will automatically review.
Does it affect my tax code?
Your redundancy payment shouldn't permanently affect your tax code. However, if emergency tax was applied, provide your P45 to your new employer to ensure the correct code is used.
What if I receive payments in installments?
The £30,000 threshold applies to the total redundancy payment, not per installment. Tax is calculated on the total amount regardless of payment schedule.
Are pension contributions affected?
Redundancy payments themselves don't count as earnings for pension purposes. However, you can make personal pension contributions from your redundancy payment to reduce taxable income.