Is Tax Payable on Redundancy Payments?

If you're made redundant, you may receive a redundancy payment as part of your final settlement. This can include statutory redundancy pay, compensation, notice pay, holiday pay, and more. While redundancy payments are meant to help you while you find new work, many people are unsure how they’re taxed.

This guide explains which parts of your redundancy payment are tax-free, which are taxable, and how to check if you've overpaid or underpaid tax when leaving your job.

What Is Redundancy Pay?

Redundancy pay is money your employer gives you when you’re dismissed because your role no longer exists. It can be either:

• Statutory redundancy pay (if you’ve been employed for at least two years), or

• Contractual or enhanced redundancy pay offered by your employer

You may also receive other payments when leaving, such as pay in lieu of notice (PILON), untaken holiday pay, or compensation for loss of employment.

How Much Redundancy Pay Is Tax-Free?

The first £30,000 of your redundancy payment is tax-free, as long as it meets HMRC’s rules for qualifying redundancy pay. This £30,000 limit applies to the total of all qualifying termination payments, not just redundancy pay alone.

If your redundancy settlement includes any ex-gratia payments or compensation for loss of office, these can usually be included in the tax-free limit – but only up to a combined total of £30,000.

What Will I Be Taxed On?

Redundancy packages often include several elements. Here's how each one is treated:

• Statutory or contractual redundancy pay: First £30,000 is tax-free. Any amount above this is subject to income tax.

• Holiday pay: Taxable as normal earnings.

• Pay in lieu of notice (PILON): Taxable in full and subject to income tax and National Insurance.

• Bonus or commission: Taxable as normal.

• Outstanding wages or untaken benefits: Fully taxable.

The only part that benefits from the £30,000 tax exemption is the actual redundancy payment and certain qualifying compensation payments.

Tax on Payments In Lieu of Notice (PILON)

PILON is paid when your employer chooses not to have you work your notice period but pays you instead. Since April 2018, all PILON is fully taxable – even if your contract didn’t specify it.

PILON is treated as earnings, meaning it is subject to:

• Income tax

• Employee National Insurance contributions

• Employer National Insurance contributions

This often results in a larger tax bill than expected, especially if it's lumped in with your final month’s wages.

Overpayment or Underpayment of Tax

If you receive a large redundancy payout, particularly near the end of a tax year, you may overpay tax because of how PAYE is calculated. HMRC’s payroll system assumes you're continuing to earn at that same rate all year, which can result in too much tax being deducted upfront.

You may also underpay tax if your employer doesn’t apply the correct code. Either way, you should:

• Check your final payslip and P45

• Use HMRC’s tax calculator or call them for a refund

• If you're due money back, it will either be refunded automatically or claimed through a Self Assessment return

If you've overpaid, HMRC will usually issue a refund after the tax year ends.

What If I Receive an Enhanced Redundancy Package?

Some employers offer additional, discretionary redundancy pay. This may still fall under the £30,000 tax-free limit, but anything above will be taxed as earnings.

Make sure to ask your employer for a full breakdown of your redundancy package to understand which parts are taxable and which are not.

Final Thoughts

In the UK, the first £30,000 of redundancy pay is tax-free. Anything above that is taxed as income. Other parts of your final payment, such as PILON and holiday pay, are taxed in full.

It’s essential to check how your employer has calculated your tax, especially if you’ve been given a lump sum. Mistakes can happen, and understanding your entitlements can help you avoid unnecessary deductions – or claim money back if you’ve paid too much.

If you’re unsure about your tax position, speak to a tax adviser or contact HMRC for guidance. A well-planned exit can help ensure your finances are in the best shape while you plan your next steps.