Redundancy Pay Tax UK 2025-26: Is Redundancy Taxable? The £30,000 Rule
If you are made redundant, part of what you receive may be completely free of income tax and National Insurance. Understanding the rules prevents you from paying more tax than you owe — or from being caught out by a bill you did not expect.
Statutory Redundancy Pay
Statutory Redundancy Pay (SRP) is the legal minimum your employer must pay if you have been employed for at least two years. The weekly cap for 2025-26 is £643 per week. The amount is calculated using an age multiplier:
- Under 22: half a week's pay per year of service
- 22 to 40: one week's pay per year of service
- 41 and over: one and a half weeks' pay per year of service
Maximum service counted is 20 years. The maximum statutory redundancy payment in 2025-26 is therefore £19,290 (20 years × 1.5 × £643).
The £30,000 tax-free threshold
The first £30,000 of a genuine redundancy payment is exempt from income tax and National Insurance. This exemption covers:
- Statutory Redundancy Pay
- Any additional ex gratia payment from your employer (above SRP)
- Compensation for loss of office, subject to the genuine redundancy rules
Amounts above £30,000 are taxed as employment income at your marginal rate and are also subject to employer (but not employee) Class 1A National Insurance.
Example: £50,000 redundancy package
| Component | Amount | Tax treatment |
|---|---|---|
| First £30,000 | £30,000 | Tax-free and NI-free |
| Excess above £30,000 | £20,000 | Taxed at marginal rate (e.g. 20% = £4,000 tax) |
| Net after tax | £46,000 |
Payment in lieu of notice (PILON)
Since 6 April 2018, all payments in lieu of notice (PILON) are fully taxable and subject to Class 1 National Insurance — regardless of whether your contract contains a PILON clause. HMRC introduced the Post-Employment Notice Pay (PENP) formula to ensure consistency.
What is PENP?
Post-Employment Notice Pay is the amount attributable to any unworked statutory or contractual notice period. The PENP is treated as employment income — not part of the £30,000 exemption. Your employer is required to calculate this and deduct PAYE and NI accordingly.
Pension contributions from redundancy pay
You can pay some or all of your tax-free £30,000 redundancy payment into a pension and potentially receive additional tax relief — subject to your annual allowance (£60,000 in 2025-26) and the requirement that contributions are within the rules for your scheme.
Frequently asked questions
Is all redundancy pay tax-free?
Only the first £30,000 of a genuine redundancy payment is tax-free. Any payment in lieu of notice, holiday pay owed, or pay for a contractual notice period served is fully taxable from the first pound.
Do I pay National Insurance on redundancy pay?
Employee NI is not charged on the tax-free £30,000 element. However, employer-only Class 1A NI (13.8%) applies to any amount above £30,000. Amounts that are treated as earnings (PILON, notice pay) attract both employee and employer NI.
What if my redundancy payment is entirely within the £30,000 limit?
If your total redundancy settlement (excluding notice pay and holiday pay) is £30,000 or less, you pay no income tax or National Insurance on it. You may still need to report it to HMRC if you complete a Self Assessment return.