How Redundancy Pay Works: Tax Rules & Calculation (2025-26)

Q: How is statutory redundancy pay calculated?

Statutory redundancy pay is calculated based on your age, length of service and weekly pay. You receive half a week's pay for each full year of service under age 22, one week's pay per year between ages 22 and 41, and one-and-a-half week's pay per year aged 41 and over. Weekly pay is capped at £700 in 2025-26, giving a maximum statutory payment of £21,000 (30 qualifying years at 1.5 weeks × £700). You must have been continuously employed for at least two years to qualify.

Q: What is the difference between notice pay and redundancy pay for tax purposes?

They are treated very differently. Genuine redundancy pay (both statutory and enhanced) benefits from the £30,000 tax-free exemption. Notice pay — whether worked, served as garden leave, or received as PILON (payment in lieu of notice) — is fully taxable as employment income with no exemption. Since April 2018, all PILON payments are subject to income tax and NI, closing a previous loophole where contractual PILON was sometimes treated as tax-free.

Redundancy can arrive unexpectedly. Understanding exactly how your payout is calculated — and how much tax you will actually owe — means you can plan your finances without unpleasant surprises.

Statutory Redundancy Pay: The Legal Minimum

If you have been continuously employed for two or more years, you are entitled to a minimum statutory redundancy payment by law. The calculation depends on three factors: your age, your length of service, and your weekly pay (capped at £700 per week in 2025-26).

Under age 22: half a week's pay for each full year of service
Age 22 to 40: one week's pay for each full year of service
Age 41 and over: one-and-a-half week's pay for each full year of service

Only the last 20 years of service count for this calculation. The maximum statutory payment therefore is: 20 years × 1.5 weeks × £700 = £21,000. In practice, most employees receive less — either because they have fewer years of service, are under 41, or earn above the £700 cap.

Worked Example: Statutory Calculation

Sarah, aged 45, has worked for the same employer for 12 years on a salary of £42,000 (weekly pay = £808, but capped at £700). Her redundancy entitlement:

Years aged 41–45 (4 years): 4 × 1.5 × £700 = £4,200
Years aged 35–40 (6 years): 6 × 1.0 × £700 = £4,200
Years aged 33–34 (2 years): 2 × 1.0 × £700 = £1,400
Statutory total: £9,800

Enhanced Redundancy Pay

Many employers offer more than the statutory minimum, particularly after long service or as part of a negotiated settlement. Enhanced payments — sometimes called ex-gratia payments — are treated exactly the same way as statutory redundancy for tax purposes. Both statutory and enhanced redundancy pay (up to a combined £30,000 per employment) qualify for the tax-free exemption.

The £30,000 Tax-Free Exemption

This is the most important rule. The first £30,000 of a genuine redundancy payment is completely free from income tax and National Insurance — regardless of the total package value. This limit applies per employment, so if you have been made redundant before and received a tax-free payment, it does not reduce your allowance on this occasion (as long as it was from a different employment).

Above £30,000, any excess is treated as employment income and taxed at your marginal rate in the tax year you receive it. If the payment pushes you into the higher rate band for the first time, you will pay 40% on the portion above £50,270.

Worked Example: £45,000 Redundancy Package

James receives a £45,000 enhanced redundancy payment. His regular salary for the year is £38,000.

First £30,000 of redundancy: tax-free, no NI
Remaining £15,000 treated as employment income
James's total taxable income = £38,000 + £15,000 = £53,000
Income tax on the £15,000 excess: £12,270 at 20% = £2,454 + £2,730 at 40% = £1,092 = £3,546
NI on the £15,000 excess: £2,000 at 2% (above £50,270) = £40 approximately
After-tax value of the £45,000 package: approximately £41,414

If James had instead been offered a £30,000 settlement, the entire amount would be tax-free — making a £30,000 package worth £30,000 in his pocket, while a £45,000 package nets him only £11,414 more. This is important context when negotiating a settlement agreement.

Notice Pay, Garden Leave and PILON: Always Fully Taxable

The £30,000 exemption only applies to the genuine redundancy element. Other payments that frequently form part of a departure package have very different tax treatment:

Notice Pay (Worked Notice)

If you work your notice period, you receive your regular salary — fully taxable as employment income under PAYE. Nothing unusual here.

Garden Leave

If your employer asks you to stay at home during your notice period but continues paying your salary, this is garden leave. It remains fully taxable as earnings — PAYE applies in full.

PILON (Payment in Lieu of Notice)

Since April 2018, all PILON payments are fully taxable — both contractual and non-contractual. Before 2018, a non-contractual PILON could sometimes be treated as part of the tax-free compensation, but this loophole is closed. Whether your contract contains a PILON clause or not, the payment is now treated as employment income and subject to income tax and NI in full.

Settlement Agreements and Solicitor Costs

Redundancy payments often come packaged within a settlement agreement (formerly called a compromise agreement), which may include additional compensation for loss of office, restrictive covenants, and a contribution toward your legal costs. The tax treatment follows the same principles: the first £30,000 of genuine compensation is exempt; notice pay and PILON are taxable. Employer contributions to your legal costs for negotiating the settlement are also typically tax-free if paid directly to your solicitor.

Impact on Your Tax Return

If you receive a redundancy payment in a tax year where the taxable portion pushes your income above the PAYE system's expectations — for instance, if you leave employment partway through the year — you may face an underpayment of tax. HMRC will collect this either through your next employer's PAYE code or via a Self Assessment return. Always declare taxable redundancy payments on your return if you complete one.

Frequently Asked Questions

Is redundancy pay tax-free in the UK?

The first £30,000 of a genuine redundancy payment is free from income tax and National Insurance in 2025-26. Any amount above £30,000 is taxed as employment income at your marginal rate. Notice pay, garden leave and PILON are always fully taxable with no exemption.

How is statutory redundancy pay calculated?

Based on age, years of service and weekly pay (capped at £700): half a week per year under 22, one week per year at 22–40, one-and-a-half weeks per year at 41 and over. Only the last 20 years of service count. Maximum possible statutory payment is £21,000.

What is the difference between notice pay and redundancy pay for tax purposes?

Genuine redundancy pay benefits from the £30,000 tax-free exemption. Notice pay — whether worked, on garden leave, or received as PILON — is fully taxable as employment income. Since April 2018, all PILON payments are subject to income tax and NI.