Being made redundant is stressful enough without worrying about how much of your payout goes to HMRC. The good news: the first £30,000 of a genuine redundancy payment is completely tax-free. This guide explains how the exemption works, what is and is not covered, and how to calculate what you actually keep.
The £30,000 tax-free exemption
The first £30,000 of a redundancy payment (statutory or enhanced) is exempt from both income tax and National Insurance. This applies whether you are made compulsorily redundant or accept voluntary redundancy. Anything above £30,000 is added to your income for the year and taxed at your marginal rate.
What counts towards the £30,000?
- Statutory redundancy pay — always tax-free (up to the limit)
- Enhanced/contractual redundancy — also covered by the £30,000 exemption
- Ex-gratia payments — one-off payments in recognition of service
- Damages for loss of employment — genuine compensation
What does NOT count (always taxable)?
- Pay in lieu of notice (PILON) — taxed as earnings whether contractual or not
- Holiday pay owed — taxed as normal salary
- Bonus payments — taxed as earnings
- Restrictive covenant payments — fully taxable
PILON is the most common confusion. If your contract includes a notice period and your employer pays you instead of making you work it, that payment is taxed and has NI deducted as if it were salary.
National Insurance on redundancy
The tax-free £30,000 is also exempt from employee NI. However, any amount above £30,000 is subject to employer NI (but not employee NI for the exemption portion). Your employer handles this — it should not reduce your payout.
How the tax is calculated in practice
Your employer will separate the redundancy payment into taxable and non-taxable elements on your P45. The taxable portion is added to your earnings for the year. If the redundancy pushes you into a higher tax band, the excess is taxed at that higher rate.
Can you reduce the tax bill?
- Ask your employer to pay the excess into your pension — employer pension contributions from redundancy payments are not subject to income tax or NI (up to the Annual Allowance)
- Timing: if you are made redundant near the end of a tax year, splitting the payment across two years may keep you in a lower bracket
Estimate your take-home
Use the income tax calculator to model your total income for the year including the taxable portion of your redundancy. This will show you the marginal rate applied and your overall take-home position.