UK Redundancy Pay Tax Treatment 2026/27
UK redundancy pay tax 2026/27 - £30,000 threshold, notice pay taxed in full, statutory pay capped at £751 a week, pension contributions from a package.
The £30,000 tax-free threshold
Under ITEPA 2003 s.403 the first £30,000 of a payment for loss of employment is free of Income Tax, and there is no employee National Insurance on it (EIM13505). It covers:
- Statutory redundancy pay
- Non-contractual (ex-gratia) termination payments
- Compensation for loss of office
- Enhanced redundancy payments that are not contractual earnings
- Benefits kept after leaving as part of the termination arrangement
Taxed as ordinary earnings, with no £30,000 threshold:
- Post-employment notice pay (PENP), including any PILON
- Holiday pay for leave accrued and not taken
- Pay for notice you work
- Contractual bonuses and other contractual payments
Above £30,000, your employer also pays Class 1A National Insurance at 15% on the excess.
Statutory redundancy calculation 2026/27
Formula: weeks per year of service (by age) x full years of service x weekly pay capped at £751. Service counts for at most 20 years, so the maximum is £22,530 (GOV.UK). Great Britain figures; Northern Ireland sets its own limits.
| Age during each full year of service | Weeks' pay per year |
|---|---|
| Under 22 | 0.5 |
| 22 to 40 | 1.0 |
| 41 or older | 1.5 |
Worked example: aged 50 with 15 full years of service, all after turning 41, weekly pay £900 (capped at £751):
- 15 years x 1.5 weeks x £751 = £16,898 statutory minimum
- Within the £30,000 threshold, so no Income Tax
Notice pay since April 2018
Since 6 April 2018 every termination needs a post-employment notice pay calculation, and PENP is taxed as earnings with Income Tax and Class 1 National Insurance (EIM13874).
PENP = (BP x D / P) - T (ITEPA 2003 s.402D): basic pay for the last pay period before notice (BP), times the days of notice not worked (D), divided by the days in that pay period (P), less amounts already taxed as earnings in connection with the termination, such as a contractual PILON (T). A negative result means PENP is nil.
Pension contribution from redundancy
If your package is over £30,000, the excess is taxed at your marginal rate. Two ways to put it into a pension instead:
- Employer pays it in as part of the termination arrangement: outside the termination-payment rules under ITEPA 2003 s.408, so no Income Tax or Class 1A.
- You contribute from the cash: the excess over £30,000 counts as relevant UK earnings for tax relief (PTM044100).
- Both count towards the £60,000 annual allowance; unused allowance from the three previous years can be carried forward if you were a scheme member.
- Access from age 55 (57 from 6 April 2028), usually with up to 25% tax-free within the £268,275 lump sum allowance.
Worked example: a £50,000 package with no notice element, higher-rate taxpayer:
- £30,000 free of Income Tax
- £20,000 taxable: taken as cash, £20,000 x 40% = £8,000 Income Tax, and the employer pays £3,000 Class 1A
- Paid by the employer into your pension under the termination arrangement: no Income Tax or Class 1A on it, and the full £20,000 goes into the pension
Negotiation tips
- Ask for the breakdown: statutory pay, notice pay (PENP), holiday pay and any ex-gratia sum are taxed differently.
- Ask for a direct employer pension contribution for any amount over the threshold, before the agreement is signed.
- Settlement agreements only stop you bringing most employment tribunal claims if, among other conditions, you have had advice from a relevant independent adviser (Employment Rights Act 1996 s.203(3)); ask whether your employer will contribute to the cost.
- Agree an end date for each benefit you keep after leaving.
Related pages
Frequently asked questions
How much redundancy pay is tax-free?
The first £30,000 of a payment for loss of employment (statutory redundancy pay plus any non-contractual compensation) is free of Income Tax under ITEPA 2003 s.403; anything above it is taxed at your marginal rate in the tax year you receive it. There is no employee National Insurance on these payments. The employer pays Class 1A National Insurance at 15% on the part of a termination award above £30,000 (HMRC rates and thresholds for employers 2026 to 2027). The threshold does not apply to notice pay, holiday pay or contractual payments, which are taxed as ordinary earnings.
What is PILON and how is it taxed?
Payment in lieu of notice. Since 6 April 2018 the employer must work out "post-employment notice pay" (PENP) for every termination, whether or not a PILON is paid, and PENP is taxed as earnings with Income Tax and Class 1 National Insurance; it never benefits from the £30,000 threshold (HMRC EIM13874). The formula in ITEPA 2003 s.402D is (BP x D / P) - T: basic pay for the last pay period (BP), times the days of notice not worked (D), divided by the days in that pay period (P), less any amount already taxed as earnings in connection with the termination, such as a contractual PILON (T). If the result is negative, PENP is nil.
What is the statutory redundancy pay cap 2026/27?
You normally qualify after 2 years with your employer. You get half a week's pay for each full year under age 22, one week's pay for each full year aged 22 to 40, and one and a half weeks' pay for each full year aged 41 or older, counting at most 20 years. Weekly pay is capped at £751 for redundancies on or after 6 April 2026, so the maximum is £22,530 (GOV.UK). These are the Great Britain figures; Northern Ireland sets its own limits. Many employers pay more under an enhanced or contractual scheme.
Can I contribute redundancy to my pension to avoid tax?
Two routes. Employer contribution: if, as part of the termination arrangement, your employer pays part of the package straight into your registered pension, that contribution is outside the termination-payment rules altogether (ITEPA 2003 s.408), so no Income Tax and no Class 1A. Your own contribution: the part of a redundancy payment above £30,000 counts as relevant UK earnings, so it supports tax relief on your own contributions in that tax year (HMRC PTM044100). Either way contributions count towards your annual allowance, £60,000 for 2026/27, plus any unused allowance carried forward from the previous three years if you were a pension scheme member then. You can draw on the pension from age 55, rising to 57 from 6 April 2028, and usually take up to 25% tax-free within the £268,275 lump sum allowance.
What's ex-gratia payment vs statutory redundancy?
Statutory redundancy pay is the legal minimum based on age, service and capped weekly pay. An ex-gratia payment is an extra, non-contractual sum. Both count towards the same £30,000 threshold for the same employment. What decides the tax is the substance of the payment, not its label: the PENP calculation applies whatever the agreement calls the money, and a payment you were contractually entitled to is taxed as earnings.
How does notice period interact with redundancy tax?
Pay for notice you work is ordinary salary. Holiday pay for leave accrued but not taken is earnings. For notice you do not work, the PENP formula applies and that amount is taxed as earnings whether you receive a PILON or not. Only the remainder of a non-contractual termination payment, after PENP has been taken out, can use the £30,000 threshold.
What about company car/private medical insurance at termination?
Benefits you keep after employment ends as part of the leaving arrangement, such as continued use of a company car or medical cover, are part of the termination package. They count towards the £30,000 threshold at their value under ITEPA 2003 s.415 rather than being reported on a P11D. Agree in writing when each benefit stops.
Should I take redundancy or stay if employer offers alternative?
Compare the net, after-tax value of the package with what you would earn by staying, and with how long it might take to find work. The £30,000 threshold makes part of a lump sum worth more than the same amount of salary, but notice pay and holiday pay are taxed like salary. If the employer offers suitable alternative work and you unreasonably refuse it, you can lose the right to statutory redundancy pay (GOV.UK suitable alternative employment). Weigh career and non-financial factors too.
How is the £30k applied across multiple termination payments?
The threshold applies per employment, and payments in respect of the same employment, or from the same or associated employers, are added together before the £30,000 is applied (ITEPA 2003 s.404). If it is spread over two tax years, the earlier payments use the threshold first. Unrelated employments that end separately each have their own threshold.
What benefits am I entitled to after redundancy?
New Style Jobseeker's Allowance is based on your National Insurance record, not your savings: up to £95.55 a week if you are 25 or over and £75.65 if under 25, for up to 182 days (GOV.UK). Universal Credit is means-tested, so a redundancy payment held as savings can reduce or remove it. Council Tax Reduction is run by your local council.