How much redundancy pay is tax-free?

First £30,000 of compensation for loss of employment is tax-free under Section 401-405 ITEPA 2003. Above £30,000: Income Tax at marginal rate (no NI on redundancy pay). The £30k threshold has been at this level since 1988 - has not been uprated and is significantly eroded by inflation. Strong case for legislative review but no movement.

What is PILON and how is it taxed?

Payment in Lieu of Notice. Since April 2018, ALL PILON is taxed as ordinary employment income via PAYE (Income Tax + employee NI + employer NI). Cannot be sheltered under £30k tax-free. Formula: PENP (Post-Employment Notice Pay) = unworked notice period × basic pay rate. Pre-2018 some PILON could be tax-free; not anymore.

What is the statutory redundancy pay cap 2026/27?

Statutory redundancy = formula based on age + years of service × weekly pay (capped). 2026/27 weekly cap: £751. Maximum 20 years of service. Maximum statutory redundancy: 1.5 × £751 × 20 = £22,530. Most employees receive only statutory minimum if employer is in difficulty - higher amounts depend on enhanced contractual schemes.

Can I contribute redundancy to my pension to avoid tax?

Yes - very tax-efficient if you have available Annual Allowance + carry forward. Redundancy contribution to pension reduces taxable income £-for-£. Above-£30k redundancy at 40% marginal: pension contribution converts £1 taxable to £1 pension cost. Especially powerful for people aged 55+ who can immediately drawdown 25% tax-free.

What's ex-gratia payment vs statutory redundancy?

Statutory redundancy: legally-mandated minimum based on age + service + capped weekly pay. Ex-gratia: voluntary additional payment by employer (often part of enhanced scheme). Both potentially fall within £30k tax-free for "compensation for loss of office" - but PILON portion always taxable. Negotiate ex-gratia framed as "compensation for loss of employment" not "additional notice payment" to maximise tax-free portion.

How does notice period interact with redundancy tax?

Worked notice: full pay during notice taxed as ordinary salary (no £30k shelter). Notice taken as holiday: pay during holiday is normal employment income. PILON (payment instead of working notice): always fully taxable since April 2018. Only payments that are NOT notice-related can fall within £30k tax-free.

What about company car/private medical insurance at termination?

Retention of company car beyond termination date: taxable BIK for the retention period. Continued private medical insurance: BIK at premium value. These often added to P11D for the tax year termination occurs. Negotiate cessation date of benefits clearly.

Should I take redundancy or stay if employer offers alternative?

Financial calculation: redundancy lump sum + new job income vs current pay continuing. £30k tax-free element makes redundancy disproportionately attractive vs salary. Statutory + 6 months pay can total £40-£60k for mid-career worker - significant lump sum for retraining, career change, or pension contribution. But weigh non-financial factors: career trajectory, references, gap on CV.

How is the £30k applied across multiple termination payments?

Per employment, not per tax year. If you receive £30k tax-free redundancy from employer A, then later redundancy from employer B in same tax year: each gets fresh £30k shelter (separate employments). However within a single employment, the £30k is shared across statutory + ex-gratia + termination compensation.

What benefits am I entitled to after redundancy?

New Style JSA (£90.50/week, contribution-based) - up to 6 months while looking for work. Universal Credit (means-tested) - may be more or less than JSA depending on circumstances. Council Tax Reduction - varies by LA. Mortgage interest support after 39 weeks via loan (repayable). Career advice via JobCentre. NHS prescription + dental help via HC2 certificate during low-income period.

Practical guide

UK Redundancy Pay Tax Treatment 2026/27

Complete guide to UK redundancy pay taxation - £30,000 tax-free threshold, PILON taxation rules, statutory minimum + cap, ex-gratia structuring, pension contribution from redundancy lump sum.

The £30,000 tax-free threshold

Under Sections 401-405 ITEPA 2003, the first £30,000 of compensation for "loss of employment" is exempt from Income Tax and NI. This covers:

Statutory redundancy pay
Ex-gratia termination payments
Compensation for loss of office
Enhanced redundancy schemes

NOT covered (always taxable):

PILON (Payment in Lieu of Notice)
Holiday pay accrued + paid
Working notice pay
Contractual bonuses
Vested share awards

Statutory redundancy calculation 2026/27

Formula: (age weighting × years of service) × weekly pay capped at £751/week. Maximum 20 years.

Age at redundancy	Weeks pay per year of service
Under 22	0.5
22-40	1.0
41+	1.5

Worked example: 50 years old, 15 years service, weekly pay £900 (capped at £751):

15 years × 1.5 weeks/year × £751 = £16,898 statutory minimum
Within £30,000 tax-free threshold

PILON taxation since April 2018

Pre-April 2018, some PILON could be sheltered. Now: ALL PILON taxable as ordinary employment income.

PENP (Post-Employment Notice Pay) formula: PENP = (basic pay during notice period) × (unworked notice / total notice). Calculated by employer and taxed via PAYE.

Pension contribution from redundancy: the key strategy

If your redundancy package exceeds £30,000, the excess is taxable at marginal rate. Pension contribution from this excess can:

Reduce taxable income £-for-£
Get tax relief at marginal rate (20%/40%/45%)
For age 55+: immediately drawdown 25% tax-free
Use carry forward to push beyond £60,000 AA in single year

Worked example: £50,000 redundancy package, 40% taxpayer, age 55:

£30,000 tax-free
£20,000 taxable - if taken as cash: £20,000 × 40% = £8,000 tax
If contributed to pension: £0 tax, £20,000 in pension
Immediately drawdown 25% tax-free: £5,000
Remaining £15,000 grows tax-free for future use

Negotiation tips

Frame ex-gratia as "compensation for loss of employment" - maximises £30k shelter
Negotiate pension contribution direct from package - avoids the cash-then-contribute round-trip
Request settlement agreement - HMRC tax-effective treatment + legal certainty
Take legal advice - employer pays up to £500 typical for settlement agreement review
Negotiate retention of company benefits beyond termination date for genuine transitions

Frequently asked questions

How much redundancy pay is tax-free?
First £30,000 of compensation for loss of employment is tax-free under Section 401-405 ITEPA 2003. Above £30,000: Income Tax at marginal rate (no NI on redundancy pay). The £30k threshold has been at this level since 1988 - has not been uprated and is significantly eroded by inflation. Strong case for legislative review but no movement.
What is PILON and how is it taxed?
Payment in Lieu of Notice. Since April 2018, ALL PILON is taxed as ordinary employment income via PAYE (Income Tax + employee NI + employer NI). Cannot be sheltered under £30k tax-free. Formula: PENP (Post-Employment Notice Pay) = unworked notice period × basic pay rate. Pre-2018 some PILON could be tax-free; not anymore.
What is the statutory redundancy pay cap 2026/27?
Statutory redundancy = formula based on age + years of service × weekly pay (capped). 2026/27 weekly cap: £751. Maximum 20 years of service. Maximum statutory redundancy: 1.5 × £751 × 20 = £22,530. Most employees receive only statutory minimum if employer is in difficulty - higher amounts depend on enhanced contractual schemes.
Can I contribute redundancy to my pension to avoid tax?
Yes - very tax-efficient if you have available Annual Allowance + carry forward. Redundancy contribution to pension reduces taxable income £-for-£. Above-£30k redundancy at 40% marginal: pension contribution converts £1 taxable to £1 pension cost. Especially powerful for people aged 55+ who can immediately drawdown 25% tax-free.
What's ex-gratia payment vs statutory redundancy?
Statutory redundancy: legally-mandated minimum based on age + service + capped weekly pay. Ex-gratia: voluntary additional payment by employer (often part of enhanced scheme). Both potentially fall within £30k tax-free for "compensation for loss of office" - but PILON portion always taxable. Negotiate ex-gratia framed as "compensation for loss of employment" not "additional notice payment" to maximise tax-free portion.
How does notice period interact with redundancy tax?
Worked notice: full pay during notice taxed as ordinary salary (no £30k shelter). Notice taken as holiday: pay during holiday is normal employment income. PILON (payment instead of working notice): always fully taxable since April 2018. Only payments that are NOT notice-related can fall within £30k tax-free.
What about company car/private medical insurance at termination?
Retention of company car beyond termination date: taxable BIK for the retention period. Continued private medical insurance: BIK at premium value. These often added to P11D for the tax year termination occurs. Negotiate cessation date of benefits clearly.
Should I take redundancy or stay if employer offers alternative?
Financial calculation: redundancy lump sum + new job income vs current pay continuing. £30k tax-free element makes redundancy disproportionately attractive vs salary. Statutory + 6 months pay can total £40-£60k for mid-career worker - significant lump sum for retraining, career change, or pension contribution. But weigh non-financial factors: career trajectory, references, gap on CV.
How is the £30k applied across multiple termination payments?
Per employment, not per tax year. If you receive £30k tax-free redundancy from employer A, then later redundancy from employer B in same tax year: each gets fresh £30k shelter (separate employments). However within a single employment, the £30k is shared across statutory + ex-gratia + termination compensation.
What benefits am I entitled to after redundancy?
New Style JSA (£90.50/week, contribution-based) - up to 6 months while looking for work. Universal Credit (means-tested) - may be more or less than JSA depending on circumstances. Council Tax Reduction - varies by LA. Mortgage interest support after 39 weeks via loan (repayable). Career advice via JobCentre. NHS prescription + dental help via HC2 certificate during low-income period.