Tax on Redundancy Pay: The £30,000 Rule and Paying Less on the Rest

Genuine redundancy compensation is tax-free up to £30,000, and there is no employee National Insurance on it at all. Anything above £30,000 is added to your income for the year and taxed at your marginal rate, and separate payments such as pay in lieu of notice (PILON), holiday pay and bonuses are taxed in full from the first pound. The part most guides skip is what you can do with the taxable excess — asking your employer to pay it straight into a pension usually removes the tax completely.

• £30,000 is the cap on genuine termination payments, including statutory redundancy pay, and it applies once per job — not per payment or per tax year.
• Notice pay is always earnings. The post-employment notice pay (PENP) rules stop employers dressing notice up as compensation.
• No employee NI on the excess above £30,000, but your employer pays Class 1A at 15% on it — which is why pension requests are often accepted.
• Employer pension contributions out of the package are exempt and do not use up your £30,000.
• Expect to be over-taxed at first. Payments made after your P45 are taxed on an 0T code, so a refund is common.

Tax-free to £30,000: what actually qualifies

The £30,000 exemption applies to payments made purely because your employment is ending — compensation for loss of your job rather than payment for work done. In practice that means:

• Statutory redundancy pay, calculated from your age, length of service and weekly pay (capped weekly pay figure, reset each April).
• Contractual or enhanced redundancy pay under your employer's redundancy policy.
• Ex-gratia or "compensation for loss of office" sums in a settlement agreement, provided they are not really notice, bonus or holiday pay.

Statutory redundancy pay is tax-free, but it is not free of the cap: it eats into the same £30,000. If your statutory entitlement is £9,000 and your employer adds £28,000 of enhanced pay, the total termination payment is £37,000 and £7,000 of it is taxable.

One £30,000 per employment, not per payment

The exemption applies to the aggregate of all qualifying termination payments from that employer and any associated employers, even if they are paid in instalments or straddle two tax years. You cannot split a £60,000 package over two years and claim £30,000 twice. Two genuinely separate jobs with unconnected employers each carry their own £30,000.

Other exempt items

Some things sit outside the £30,000 altogether and are worth identifying in a settlement agreement: employer contributions paid directly into a registered pension scheme, payments for genuine injury or disability that caused you to stop work, outplacement counselling and retraining, and legal fees paid direct to your solicitor under the settlement agreement.

What's always taxed, whatever the paperwork says

Anything that is payment for your employment rather than compensation for losing it is earnings: income tax and Class 1 NI at 8% between £12,570 and £50,270 and 2% above.

PILON tax and the PENP trap

If your contract has a PILON clause and you are paid your notice as a lump sum, that sum is straightforwardly earnings. If there is no clause and the employer terminates immediately with a large "compensation" payment, the PENP rules recalculate what your basic pay for the unworked notice period would have been and treat that slice as earnings regardless of the label on it. The remainder is then a genuine termination payment eligible for the £30,000.

So a £45,000 package for someone on £4,000 a month basic with three months' unworked notice is not £30,000 tax-free plus £15,000 taxable. It is £12,000 of PENP taxed as earnings with NI, then £33,000 of termination payment — £30,000 exempt and £3,000 taxable.

National Insurance above £30,000

You pay no employee NI on the taxable excess of a termination payment — income tax only. Your employer, however, pays Class 1A NI at 15% on everything above £30,000. On a £30,000 excess that is £4,500 of employer cost, and it disappears entirely if the money goes into your pension instead. That shared saving is the strongest argument you have when you ask.

Paying redundancy into a pension

There are two routes, and they are not equally good.

Route 1: employer pays it direct (usually better)

Ask for part or all of the taxable excess to be paid by your employer straight into your workplace or personal pension as an employer contribution. Employer contributions to a registered scheme are exempt from the termination payments charge, so there is no income tax, no employee NI and no employer Class 1A. £30,000 of excess becomes £30,000 in the pension instead of roughly £18,000 in your bank account after 40% tax.

This has to be agreed before the payment is made and written into the settlement agreement — you cannot redirect money you have already received. Ask early, and ask in writing.

Route 2: you contribute from the net payment

If the employer will not play, you can pay into a personal pension yourself. A £24,000 net payment is grossed up to £30,000 by basic-rate relief at source, and a higher-rate taxpayer claims the extra 20% (£6,000) through Self Assessment or by contacting HMRC. You end up in a similar place, but you carry the cash-flow and the paperwork, and the employer's Class 1A has already been paid.

The limits that bite

• Annual allowance £60,000 across all contributions (yours and your employer's) in the tax year. Unused allowance from the previous three years can often be carried forward if you were a pension scheme member in those years.
• Money purchase annual allowance £10,000 if you have already flexibly accessed a defined contribution pension. This is the single most common trap for people in their late 50s taking redundancy.
• Tapering once adjusted income exceeds £260,000, down to a minimum of £10,000.
• Personal contributions are capped by your relevant UK earnings for the year. Taxable termination payments are generally not relevant earnings, so route 2 can be limited by the salary and notice pay you actually received.
• You cannot touch it until age 55 (57 from 2028) — pension money is locked away, which matters if you are about to be out of work.

A personal contribution also cuts your adjusted net income, which can be worth more than the headline relief: it can restore Personal Allowance lost to the £100,000 taper, or pull you back under the £60,000 High Income Child Benefit Charge threshold. If you are weighing cash now against relief today, the pension contribution decision tool shows the net effect at your income level.

Timing across tax years

A termination payment is taxed in the tax year you receive it. If your job ends in February or March and the payment lands after 6 April, it is taxed against a fresh Personal Allowance and fresh basic-rate band — and if you are out of work for part of the new year, much of the excess may be taxed at 20% rather than 40%.

Two cautions. First, the £30,000 is not refreshed by a new tax year, so splitting a payment buys you band space, not a second exemption. Second, you rarely control the date: it follows your termination date and the contract, and HMRC will look at when you became entitled to the money. Any request to defer needs to be agreed commercially and documented.

The 0T code and getting your refund

Payments made after your P45 has been issued must be taxed using code 0T on a month 1 basis — no Personal Allowance, and each slice of the payment taxed at 20%, 40% and 45% as if it were one month's pay. That very often over-collects tax. If you do not start a new job quickly, you can claim the overpayment back during the year rather than waiting for HMRC's end-of-year reconciliation, using the "claim back income tax when you've stopped working" route on GOV.UK. If you start a new job, give your new employer the P45 and the code should correct itself.

Worked example

Priya works in England on a £75,000 salary and is made redundant on 30 September 2026, halfway through the tax year. Her package is:

• Salary already paid in 2026/27: £37,500
• PILON of three months: £18,750
• Accrued holiday pay: £2,000
• Statutory redundancy £8,000 plus enhanced redundancy £52,000 = £60,000 termination payment

Step 1 — earnings. £37,500 + £18,750 + £2,000 = £58,250, all taxed as normal pay with NI.

Step 2 — the termination payment. £60,000 less the £30,000 exemption = £30,000 taxable, with no employee NI.

Step 3 — total taxable income. £58,250 + £30,000 = £88,250. Personal Allowance £12,570, so £75,680 is taxable: £37,700 at 20% = £7,540, and £37,980 at 40% = £15,192. Total income tax £22,732.

Step 4 — the cost of the excess. Without the £30,000 excess her tax would be £10,732, so the excess costs her exactly £12,000 in tax — 40% of £30,000. Her employer also pays £4,500 of Class 1A NI on it.

Step 5 — the pension version. If the £30,000 excess is paid direct into her pension, Priya's income tax stays at £10,732, the employer's £4,500 Class 1A disappears, and £30,000 lands in the pension instead of £18,000 in her current account. She is £12,000 better off in gross terms, provided she has £30,000 of annual allowance available and has not triggered the £10,000 MPAA.

The same package in Scotland

Scottish income tax rates apply to non-savings income, and a termination payment is non-savings income. On these figures the £30,000 excess would be taxed at the Scottish higher rate of 42% and then at the advanced rate of 45% once total income passes the advanced rate threshold — roughly £13,000 of tax rather than £12,000. NI is UK-wide and unaffected.

What to do next

Work out how your package splits between exempt compensation and taxable earnings before you sign anything — the totals on an offer letter rarely show it. Put your figures into the redundancy pay calculator to see the tax on the excess and what you will actually receive, then use the pension contribution decision tool to compare taking the cash against asking for the taxable slice to be paid into your pension. If your job has already ended and no new one has started, check whether an 0T code has over-taxed you and reclaim it.