The first £30,000 of a genuine redundancy payment is completely tax-free. However, other payments made at the same time — such as holiday pay, pay in lieu of notice, and bonuses — are fully taxable. Knowing the difference can save you thousands. Here is the complete breakdown for 2026/27.
What Is and Is Not Tax-Free: Quick Reference
| Payment type | Income Tax | National Insurance |
|---|---|---|
| Statutory redundancy pay (up to £30,000) | Exempt | Exempt |
| Enhanced redundancy pay — first £30,000 total | Exempt | Exempt |
| Enhanced redundancy — amount over £30,000 | Taxable at marginal rate | Employer Class 1A only (no employee NI) |
| Pay in lieu of notice (PILON) | Taxable as earnings | Taxable as earnings |
| Holiday pay owed | Taxable as earnings | Taxable as earnings |
| Bonus owed at time of redundancy | Taxable as earnings | Taxable as earnings |
| Outplacement support (career counselling etc.) | Exempt up to reasonable cost | Exempt |
The £30,000 Exemption: How It Works
The £30,000 exemption applies to the total of all qualifying termination payments, not to each component separately. If your employer gives you statutory redundancy pay of £8,000 and an ex gratia payment of £25,000, the total is £33,000 — and £3,000 of that is taxable.
The exemption does NOT apply to:
- Holiday pay owed
- Pay in lieu of notice (all of it is taxable as earnings since April 2018)
- Contractual bonuses
- Commission earned but unpaid
- Pay for any worked period
These are taxable employment income regardless of whether they are paid as part of a redundancy package.
Statutory Redundancy Pay: The Calculations for 2026/27
Statutory redundancy pay is calculated based on your age, years of service, and weekly pay (capped at £700/week in 2026/27):
| Age during each year of service | Rate |
|---|---|
| Under 22 | 0.5 week’s pay |
| 22 to 40 | 1 week’s pay |
| 41 and over | 1.5 weeks’ pay |
Maximum statutory redundancy pay: 20 years × 1.5 × £700 = £21,000 — well below the £30,000 exemption in most cases.
Worked Example: Mark’s Redundancy Package
Mark, aged 45, has worked for his employer for 12 years. His weekly pay is £900 (above the £700 cap).
Statutory redundancy (capped at £700/week):
- 3 years aged 22–40 × 1.0 × £700 = £2,100
- 9 years aged 41+ × 1.5 × £700 = £9,450
- Statutory total: £11,550
His employer also pays:
- Enhanced ex gratia redundancy: £22,000
- PILON (3 months’ notice): £6,750 (based on actual salary £900/week)
- Holiday owed: £900
Tax analysis:
- Total qualifying redundancy (statutory + ex gratia): £33,550
- Tax-free under £30,000 exemption: £30,000
- Taxable redundancy excess: £3,550 (taxed at 40% = £1,420)
- PILON: £6,750 fully taxable as earnings
- Holiday pay: £900 fully taxable as earnings
- Total additional tax: approximately £4,484
Post-Employment Notice Pay (PENP): The Key Calculation
Since April 2018, HMRC uses a formula called Post-Employment Notice Pay (PENP) to ensure the correct amount of any termination payment is taxed as earnings. The PENP rules apply where notice is not fully worked.
The simplified formula:
PENP = (Basic pay per day × Unworked notice days) − any PILON already taxed
If PENP is positive, that amount is treated as taxable earnings and taken out of the £30,000 exemption pool. This prevents employers from disguising PILON as tax-free redundancy pay.
Does the Tax-Free Amount Affect My Tax Code or Self Assessment?
If your redundancy payment is:
- Under £30,000: no tax, no reporting required
- Over £30,000: the excess is reported through payroll by your employer; Income Tax is deducted via PAYE
If your total income for the year (including the taxable redundancy excess) tips you into a new rate band or creates an underpayment, you may need to file a Self Assessment return or HMRC will collect via a tax code adjustment in a future year.
Planning Points
- Timing of payment: if your redundancy payment can be split across two tax years (e.g. agreed in March, paid in April), some of the taxable excess may fall in a year when your income is lower
- Pension contributions: you can contribute up to your earnings (including taxable termination pay) to a pension in the year of redundancy and claim higher rate relief
- Benefits: ensure any capital from redundancy does not push your savings above the Universal Credit capital limits if you plan to claim benefits while looking for work
See our PAYE income tax guide, Self Assessment guide, and National Insurance rates 2026/27.