Is Redundancy Pay Taxable in the UK? The Complete £30000 Exemption and Payroll Guide
Redundancy pay is a statutory or contractual termination payment that carries its own tax treatment separate from ordinary salary, with up to £30,000 exempt from Income Tax and National Insurance.
Is redundancy pay taxable above that threshold, and does the £30,000 exemption itself remain unchanged for the 2026/27 tax year even after April’s uprating of statutory redundancy pay rates? Yes.
Key takeaways
- Up to £30,000 of qualifying redundancy pay is exempt from Income Tax and employee National Insurance.
- The statutory weekly pay cap rose to £751 and the maximum statutory payment to £22,530 from 6 April 2026.
- Employee National Insurance is not charged on any part of a genuine redundancy payment, even on the taxable excess above £30,000.
Is redundancy pay taxable in the UK?
Yes, but only above £30,000. Statutory and enhanced redundancy pay is exempt from Income Tax and employee National Insurance up to that threshold; anything beyond it is taxed at the employee’s marginal rate.
What Makes Redundancy Pay Taxable or Tax-Free?
Redundancy pay is tax-free up to £30,000 when it genuinely compensates an employee for losing their job, not for work already done. This is sometimes loosely called severance pay, though that isn’t a defined term in UK employment law.
This exemption applies to statutory redundancy pay, enhanced payments and ex-gratia sums together. HM Revenue and Customs (HMRC) combines all qualifying elements from the same employment; it doesn’t apply £30,000 separately to each payment type.
| Payment type | Income Tax | National Insurance |
|---|---|---|
| Redundancy pay (up to £30,000) | Exempt | Exempt |
| Redundancy pay (above £30,000) | Taxed at marginal rate | Employee: exempt · Employer: Class 1A applies |
| Notice pay (PILON) | Taxed as earnings | Taxed as earnings |
| Holiday pay | Taxed as earnings | Taxed as earnings |
| Bonuses or commission owed | Taxed as earnings | Taxed as earnings |
A separate figure often causes confusion here: the £751 weekly cap governs how much statutory redundancy pay an employee can receive under the current GOV.UK rates, not how much of a package is tax-free. The two limits work independently.
Classifying these elements accurately ensures subsequent payroll calculations run smoothly.
What Payments Count Towards the £30,000 Limit?
Only genuine compensation for job loss counts towards the £30,000 exemption, payments that represent earnings under the contract are always taxed in full.
Employers often assume the whole termination package is protected by the £30,000 rule. It isn’t:
- Payment instead of notice (PILON) is always taxed as earnings since April 2018, regardless of contract wording.
- Accrued but untaken holiday pay is treated as ordinary wages, taxed and subject to National Insurance as normal.
- Outstanding bonuses, commission or overtime are taxed as earnings even when paid alongside redundancy pay in one lump sum.
Once each element is classified correctly, the tax-free portion and the taxable portion can be run through payroll separately.
How Do You Process Tax on Redundancy Pay Through Payroll?
Processing redundancy pay correctly means splitting the package into its tax-free and taxable elements before running anything through PAYE.
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Classify each payment into separate genuine compensation from earnings-based elements like PILON and holiday pay.
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Apply PAYE only to the taxable elements that exceed £30,000, plus any PILON, holiday pay, or bonus.
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Apply employer Class 1A National Insurance to the amount above £30,000; employees pay no NI on this portion.
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Issue a P45, or a separate letter for the tax-free element, confirming the breakdown of what was paid and reported to HMRC.
Failing to classify these payments correctly can result in incorrect tax deductions and retroactive liabilities for employers.
When Do You Need to Report Redundancy Pay to HMRC?
Yes, any taxable element of a redundancy payment must be reported to HMRC through Real Time Information (RTI) at the point it’s paid. Genuine tax-free statutory redundancy pay doesn’t need the same treatment, but timing changes how the taxable portion is taxed:
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Paid before the P45 is issued: the taxable excess is reported through normal payroll RTI using the employee’s usual tax code. If you are unsure about how a particular employee’s coding affects their termination payments, using a UK tax code checker can help clarify what deductions apply before processing the final payroll.
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Paid after the P45 is issued: HMRC requires an emergency 0T tax code on a non-cumulative basis, which can lead to over-deduction that the employee later reclaims.
Following this sequence carefully prevents reporting errors and reduces the risk of tax over-deductions.
Why Does Enhanced or Voluntary Redundancy Get Taxed Differently?
Enhanced and voluntary redundancy pay isn’t taxed differently in principle, both qualify for the same £30,000 exemption as statutory pay, provided they genuinely compensate for job loss.
Volunteering for redundancy doesn’t change the tax position, and enhancing a statutory payment doesn’t reduce the exemption available; the £30,000 limit still applies to the combined total.
Where the numbers matter is scale: an enhanced package is far more likely to exceed £30,000, pushing more of it into taxable territory.
Voluntary redundancy pay qualifies for the same £30,000 tax-free exemption as compulsory redundancy in the UK, provided the payment compensates the employee for losing their job rather than rewarding work completed.
The fact that the employee chose to volunteer doesn’t affect HMRC’s tax treatment of the payment.
Employers can also redirect some of the taxable excess into an employee’s pension, an option worth flagging alongside Pension Wise’s free guidance, within annual allowance limits, to reduce the immediate tax bill.
What Happens If You Get Redundancy Tax Wrong?
Misclassifying redundancy pay creates liability for the employer, not just an inconvenience for the employee; HMRC can recharacterise incorrectly labelled payments and pursue unpaid tax.
- HMRC can treat a mislabelled compensation payment as earnings and demand PAYE and National Insurance retrospectively.
- Employers become liable for unpaid tax, employer National Insurance, and interest on the shortfall.
- Persistent errors can trigger wider payroll compliance checks beyond the individual case.
Acas and a qualified payroll adviser can help confirm classification before a settlement agreement is signed, rather than after HMRC raises a query.
Conclusion
Determining whether redundancy pay is taxable depends primarily on the £30,000 threshold, requiring careful classification of every package component before running payroll.
Statutory redundancy pay, enhanced payments and voluntary packages all share the same exemption; PILON, holiday pay and bonuses never do.
Employers who process this correctly protect both their compliance position and their departing employees’ take-home pay.
Disclaimer: Tax rules for redundancy payments vary by individual circumstances and employment contract terms. Figures in this article reflect rates published for the 2026/27 tax year; employers should confirm current details directly with HMRC or a qualified payroll adviser.
FAQs
Is the first £30,000 of redundancy pay tax-free?
Yes. The £30,000 exemption applies to the combined total of all qualifying termination payments from one employment, not to each payment separately. It covers statutory, enhanced and voluntary redundancy pay alike.
Does redundancy pay count as taxable income?
Only the portion above £30,000 counts as taxable income. The exempt element isn’t included in the employee’s tax calculation for the year, though PILON, holiday pay and bonuses are always taxable regardless of package size.
How can employers reduce the tax employees pay on redundancy above £30,000?
Employers can agree to pay the taxable excess directly into the employee’s pension instead of cash, which removes it from Income Tax, subject to annual allowance limits. This needs to be agreed before the payment is made, not after.
