Tax on Redundancy Payments: What Are the Redundancy Pay Tax Rules?

Receiving a redundancy payment can provide financial support during a period of change, but it is important to understand how tax applies. While some redundancy payments can be paid tax-free, other parts may be subject to Income Tax and National Insurance depending on the type and amount of payment received. For a complete overview of how personal tax works across all income types in the UK, our UK personal tax guide for individuals and employees provides the broader framework before exploring redundancy tax rules specifically.

Understanding the rules around tax on redundancy payments can help you avoid unexpected tax deductions and ensure you know how much of your payment you can keep. This guide explains how redundancy pay tax rules work, when redundancy payments are taxable, and what you need to consider before accepting a payment from your employer.

Are Redundancy Payments Tax-Free?

The first £30,000 of a genuine redundancy payment can usually be received tax-free. This applies whether the payment is statutory redundancy pay or an enhanced redundancy package offered by your employer. However, the £30,000 exemption does not apply to all payments made when employment ends.

For a detailed breakdown of exactly which payments qualify for the tax-free exemption and the conditions that must be met, see our dedicated guide on which redundancy payments can be received tax-free.

Certain amounts may still be treated as taxable income, meaning you may need to pay Income Tax and National Insurance.

Payments that may be taxable include:

• Outstanding salary payments
• Payments for unused holiday entitlement
• Payments made instead of notice (PILON), depending on the circumstances
• Bonuses or contractual payments owed before employment ends

How Much Redundancy Pay Are You Entitled To?

If you have worked for your employer for at least two years and are made redundant, you are normally entitled to statutory redundancy pay. The amount depends on your age, weekly pay, and length of service.

The statutory redundancy calculation is based on:

• Your age during each complete year of service
• Your weekly pay (subject to the statutory limit)
• Your total years of continuous employment

Statutory Redundancy Pay Calculation

The calculation is subject to statutory limits on weekly pay and the maximum number of years of service that can be counted.

For employees whose redundancy falls within the 2025/26 tax year, it is particularly important to ensure the payment is correctly reflected in your tax records for that year our guide on reviewing your overall tax position for 2025/26 sets out what to check and how to confirm your tax code and records are accurate for that specific year.

For business owners considering redundancy within a family-run business, the rules around entitlement and tax treatment can be more complex our guide on the tax and employment rules for employing family members covers the obligations that apply when family employees are made redundant, including PAYE reporting and statutory entitlement considerations.

When Do You Pay Tax on Redundancy Payments?

Although redundancy payments can benefit from the £30,000 tax exemption, any amount above this limit is normally treated as taxable income.

For example, if your employer provides a redundancy package of £45,000 and the payment qualifies as a termination payment, the first £30,000 may be tax-free. The remaining £15,000 would normally be subject to Income Tax.

The way your employer reports the payment to HMRC will determine how the taxable element is processed through payroll. In some cases, where employment ends and a new role begins shortly afterwards, an emergency tax code may be applied to your new income our guide on what emergency tax codes mean and how to correct them explains when these codes are triggered and the steps to take to ensure your correct code is reinstated quickly.

Understanding Redundancy Tax Rules for Different Payments

Not every payment received after leaving employment is treated as redundancy pay for tax purposes. HMRC looks at the nature of each payment when deciding whether it qualifies for tax relief.

Statutory Redundancy Pay

Statutory redundancy pay is generally included within the £30,000 tax-free threshold, provided it meets the relevant conditions.

Enhanced Redundancy Payments

Some employers offer enhanced redundancy packages that exceed the statutory minimum. These may still qualify for the £30,000 exemption, but any amount above the limit is normally taxable.

Notice Pay and Holiday Pay

Payments relating to notice periods, unpaid wages, bonuses, and unused holiday entitlement are usually taxable because they are considered earnings rather than compensation for redundancy. These taxable elements are processed through payroll and may result in a temporary change to your tax code for a full explanation of what different tax codes mean and how taxable earnings affect your PAYE code, see our guide on how UK tax codes work including 1257L, BR and 0T.

What Happens If Your Redundancy Payment Is Taxed Incorrectly?

Incorrect treatment of redundancy payments can result in either paying too much tax or receiving an unexpected tax bill later.

Common issues include:

• Tax being deducted from payments that should have qualified for exemption
• Tax-free redundancy amounts being incorrectly reported
• HMRC adjusting your tax position after reviewing your circumstances

If you believe your employer has applied the wrong treatment, you should review your payslip, P45, and any documents relating to the redundancy agreement. Where HMRC identifies an underpayment following a redundancy situation, they may seek to recover the amount by adjusting your tax code in a future year our guide on paying tax via your tax code explains how this recovery process works and what to expect if your code is updated as a result.

Planning Considerations Before Accepting a Redundancy Package

Before agreeing to a redundancy payment, it is worth reviewing how the payment will be treated for tax purposes.

You should consider:

• Whether the payment qualifies for the £30,000 exemption
• How much of the package will be taxable
• The impact on your overall Income Tax position for the year
• Whether you have other income sources after leaving employment

If redundancy occurs close to the end of the tax year, the timing of payments and other income can affect your overall tax position.

It is also worth being aware that receiving a redundancy payment is one of the most common triggers for HMRC to issue a new or updated tax code our guide on the circumstances that cause your tax code to change explains how employment changes including redundancy affect your code and what to check when you receive a revised notice.

Check Your Redundancy Payment Tax Position

Understanding paying tax on redundancy payments can be complicated, especially where your package includes multiple payments such as notice pay, bonuses, or enhanced benefits.

Cigma Accounting helps individuals understand how redundancy payments are taxed, review their tax position, and ensure payments are correctly treated under current HMRC rules. Professional advice can help you identify potential issues early and avoid unexpected tax liabilities.

As a practical first step, reviewing your current tax code is strongly recommended following any redundancy situation our guide on how to check your tax code is accurate after an employment change walks you through exactly where to find your code and how to confirm it correctly reflects your new circumstances.