Yes, you do pay tax on redundancy in the UK, but only in part. The first £30,000 of your redundancy pay is tax-free if it qualifies as compensation for job loss.
Any amount above that is taxed at your usual income tax rate, and some elements of your redundancy package, like PILON and holiday pay, are always taxable.
Here are the key takeaways:
- The first £30,000 of redundancy compensation is tax-free
- Pay in lieu of notice (PILON) and holiday pay are always taxable
- Redundancy pay must be from a genuine redundancy to be tax-exempt
- You may need to claim tax back or pay more based on how much tax your employer deducts
- If your employer is insolvent, you can claim your pay from the Insolvency Service
Understanding your redundancy tax obligations can help you avoid surprise bills and ensure you receive what you’re entitled to.
What Is Redundancy Pay and Who Is Eligible?
Redundancy pay is compensation you receive when your employer no longer needs your role and ends your employment as a result. To be eligible, you must be classified as an employee and have worked continuously for your employer for at least 2 years.
This pay is offered in two types: statutory redundancy pay, which is the minimum set by UK law, and contractual redundancy pay, which may exceed the statutory amount and is set out in your employment contract.
Eligibility also depends on the reason for redundancy being genuine, such as business closure, downsizing, or restructuring. You’re not entitled to redundancy pay if you’re dismissed for misconduct or if your employer offers you suitable alternative employment and you turn it down without a valid reason.
If you’re on a fixed-term contract and it’s not renewed due to redundancy, you may still qualify, provided your total service is at least 2 years.
Certain categories, like members of the armed forces, police, and domestic servants within a family, are excluded from statutory redundancy rights.
Statutory redundancy pay is calculated based on your age, length of service and weekly wage. Your employer must provide the payment on or shortly after your final working day.
Do You Pay Tax on Redundancy Payments in the UK?
When facing redundancy, it’s natural to wonder how much of your payout you’ll get to keep. The good news is, not all redundancy pay is taxed, but there are strict rules around what is and isn’t taxable.
Is redundancy pay taxed in the UK?
Yes, it can be. The first £30,000 of a genuine redundancy payment is tax-free, including statutory and ex-gratia payments made specifically to compensate for job loss.
Anything above this threshold is taxed at your normal income tax rate. You won’t pay National Insurance on this portion.
However, other components of your final payment that are not considered compensation for job loss, such as pay in lieu of notice and holiday pay, are treated as ordinary earnings and taxed accordingly.
What’s included in the £30,000 tax-free threshold?
The tax-free portion includes:
- Statutory redundancy pay: The legal minimum paid after 2 years’ service
- Ex gratia payments: Additional, voluntary compensation from your employer
- Non-cash benefits: Items like a company car are given a cash value and count towards the £30,000 threshold
It’s important to note that any contractual elements of your package that relate to your work, rather than to your redundancy, do not fall under this exemption.
Examples of tax-free redundancy
To clarify how this works, here are a few simple scenarios:
- Example 1: You receive a redundancy payment of £25,000 and a PILON of £2,000.
- The £25,000 is tax-free.
- The £2,000 is taxed as regular income.
- Example 2: Your employer pays £35,000 in redundancy compensation, and you get to keep your company laptop, valued at £1,000.
- The first £30,000 is tax-free.
- The remaining £6,000 (including laptop value) is taxed.
Understanding what’s exempt and what’s taxable ensures you can plan financially and avoid miscalculations.
What Parts of Your Redundancy Package Are Taxable?
Not everything you receive at redundancy is tax-free. Several components of your payout are treated as ordinary income and taxed accordingly, regardless of whether you’re under or over the £30,000 threshold.
Here’s what is considered taxable:
- Any redundancy pay over £30,000
- Pay in Lieu of Notice (PILON): If you don’t work your notice period, but are paid for it instead, this is fully taxable
- Accrued holiday pay: Payment for unused holiday is taxed as normal wages
- Bonuses or commission: These are classed as income and subject to tax and National Insurance
- Non-cash benefits: The cash value is included in your total package and taxed accordingly once over the £30,000 limit
It’s essential your employer correctly separates taxable and non-taxable amounts when issuing your final payment. Even then, the tax deducted may not be completely accurate, so it’s worth checking and contacting HMRC if needed.
How Is Redundancy Pay Calculated?
Understanding how your redundancy pay is calculated can help you verify what you’re owed and plan accordingly. The UK follows a structured formula based on your age, years of service, and weekly pay.
Factors: age, service length, weekly pay
The amount you’re entitled to depends on:
- Your age at the time of each year of service
- How many full years have you worked for your employer (maximum 20)
- Your average weekly wage over the 12 weeks before your redundancy notice
The government updates the weekly wage cap each tax year. From 6 April 2025, the maximum weekly wage used to calculate redundancy is £719, with a maximum statutory redundancy payout of £21,570.
Statutory redundancy rates for 2025–2026
- Half a week’s pay for each full year under the age of 22
- One week’s pay for each full year aged 22 to 40
- One and a half week’s pay for each full year aged 41 and over
Only full years of service count, and any partial years won’t be included.
Sample calculation table for clarity
Here’s a breakdown of how different redundancy components are taxed:
| Payment Type | Taxable? | Notes |
|---|---|---|
| Statutory Redundancy Pay | No | Up to £30,000 is tax-free if it's for genuine redundancy |
| Redundancy Pay Over £30,000 | Yes | Taxed at your usual income tax rate |
| Pay in Lieu of Notice (PILON) | Yes | Treated as regular income |
| Accrued Holiday Pay | Yes | Treated as regular wages |
| Bonuses/Commission | Yes | Taxed as earnings |
| Non-Cash Benefits | Yes | Value included in the £30k cap, taxed if threshold exceeded |
Verifying your redundancy pay using this format will ensure transparency and help you dispute errors if they arise.
Can You Reduce or Avoid Tax on Your Redundancy Pay?
Yes, there are a few ways to minimise your tax bill, but they require advance planning and support from your employer.
Here’s how:
- Pension contributions: If your redundancy payment exceeds £30,000, ask your employer if they can pay the excess directly into your pension. This is tax-efficient and could reduce your liability.
- Use salary sacrifice schemes, where available, to restructure your payout
- Time your payment carefully. If your income is lower for the rest of the tax year, the overall tax rate on the excess may be lower
- Get advice from an independent financial adviser to explore legal strategies for keeping more of your money
While you can’t avoid tax entirely, these approaches may significantly reduce how much you lose to HMRC.
Who Deducts Tax from Your Redundancy Pay?
Your employer is responsible for deducting tax and National Insurance contributions from your redundancy payment where required. However, the redundancy tax is calculated based on annual earnings, so the amount deducted may not always be correct.
If you are taxed too much or too little, you’ll need to either claim a refund or pay the difference through HMRC. Sometimes you may be asked to complete a Self Assessment at the end of the tax year to correct any discrepancies.
Employers must provide a breakdown of how your final payment was calculated, including taxable and non-taxable portions. Always review this carefully and seek clarification if anything looks wrong.
What Are Your Rights During Redundancy?
When you’re being made redundant, you are entitled to fair treatment under UK employment law. Employers must follow a fair selection process, provide consultation, and uphold your legal rights throughout the process.
Here are your key rights:
- Redundancy pay: If you’ve worked for 2 years or more
- Notice period: At least 1 week for each year served (up to 12 weeks)
- Consultation: Individual if fewer than 20 redundancies, collective if more
- Time off to job hunt: If you’ve worked continuously for 2 years
- Right to appeal: If you feel you’ve been unfairly selected
- Protection from discrimination: You cannot be selected due to gender, age, pregnancy, etc.
You may also be offered suitable alternative employment, and refusing this without a good reason can affect your redundancy entitlement. If you feel your rights have been violated, you can raise a grievance, contact Acas, or file a claim with an employment tribunal.
What If Your Employer Is Insolvent?
When an employer goes out of business, employees may worry about getting the redundancy pay and other entitlements owed to them. Fortunately, the UK government provides a safety net through the Insolvency Service.
How to claim redundancy through the Insolvency Service
If your employer becomes insolvent, they won’t be able to pay redundancy, holiday pay or other final payments.
In this case, you can submit a claim to the Insolvency Service using the case number provided by the insolvency practitioner handling the company’s closure.
You’ll need to complete the online form on the GOV.UK website and provide evidence such as payslips, your redundancy letter, and contract details. Payments are subject to statutory limits, including the weekly pay cap.
What to do if you haven’t been paid
If your employer delays or refuses payment and isn’t insolvent:
- Write a formal letter to your employer stating what you’re owed
- Engage Acas for early conciliation to resolve the issue
- If needed, file a tribunal claim within 6 months (or 3 months for unfair dismissal)
Keep copies of all communication and documents. If the employer is avoiding payment without legal cause, you may be able to recover what’s owed through the tribunal or court process.
Conclusion
Redundancy can be overwhelming, but knowing your tax obligations and rights helps protect your financial future. You’ll be pleased to know that up to £30,000 of redundancy pay is tax-free, provided it qualifies as genuine compensation. However, elements like PILON, holiday pay, and bonuses are taxable and must be considered.
Always check your payout breakdown, explore tax-saving options like pension contributions, and be proactive in claiming what you’re owed, especially if your employer becomes insolvent. Understanding the rules puts you in control during a difficult time.
FAQs
Is redundancy pay always tax-free in the UK?
No, only the first £30,000 of genuine redundancy pay is tax-free. Anything above that is taxed at your usual rate.
How do I know if my PILON is taxable?
All PILON payments, whether in your contract or not, are taxed as normal income. They’re treated the same as a salary.
Can I put redundancy money into my pension to avoid tax?
Yes, some or all of your redundancy pay can be contributed to a pension scheme to reduce tax. Speak with your employer and adviser first.
What if I think I’ve been taxed too much on redundancy pay?
You can contact HMRC to reclaim overpaid tax. A self-assessment may be needed at the end of the tax year.
Does maternity or sick leave affect redundancy calculations?
No, your redundancy pay is based on your usual wage before any leave. It won’t be reduced due to sick or maternity pay.
Can I still get redundancy pay if I refuse an alternative job offer?
ou may lose your right to redundancy pay if you reject a suitable alternative role without good reason. A trial period is also offered.
How do I claim redundancy pay if my employer has gone bust?
You’ll need to claim through the Insolvency Service using a reference number. The claim must include your employment details and supporting documents.
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