Tax on redundancy pay: the £30,000 rule

The £30,000 exemption

Statutory redundancy pay under £30,000 is not taxable (GOV.UK). The same £30,000 allowance covers genuinely ex gratia termination payments — the enhanced element an employer adds on top of the statutory minimum, commonly through a settlement agreement. Everything within the allowance is paid free of income tax and National Insurance.

The maximum statutory redundancy payment is £22,530 from 6 April 2026 (GOV.UK), so statutory pay alone can never breach the allowance — it's the enhanced element that takes packages over £30,000. Amounts above £30,000 are taxed as income.

What's taxed as normal earnings

A termination payment is usually several things added together, and the parts are taxed differently. Money you were owed anyway — holiday pay, unpaid wages, bonuses and commission — is taxed as earnings in the normal way, with income tax and National Insurance deducted (GOV.UK's termination payments guidance). It does not use up, or benefit from, the £30,000 allowance.

Notice pay follows the same rule: whether you work your notice or receive payment in lieu of notice (PILON), pay for the notice period is taxed as earnings (GOV.UK). Since 2018 the rules have been explicit that employers can't dress notice pay up as tax-free termination pay — so if a proposed package shows your notice inside the 'tax-free' figure, question it.

Sense-checking your final payslip

Line up the letter against the payslip in four buckets: statutory redundancy pay and any ex gratia element (tax-free up to £30,000 combined); notice/PILON (taxed as earnings); holiday, wages, bonus and commission owed (taxed as earnings); and anything else — pension contributions paid into your scheme, outplacement support funded directly by the employer — which has its own treatment.

Two practical notes. First, PAYE on a final payment sometimes over- or under-deducts because of how tax codes handle one-off sums; HMRC reconciles this, but check rather than assume. Second, if your package is large or includes shares, options or a pension element, paid tax advice is worth the fee — the £30,000 boundary is simple, but what sits either side of it often isn't.

One more planning point while the payout is in your account: it is a runway, not a windfall. The fastest way to protect it is to shorten the gap to your next role — which is precisely the job our redundancy support programme exists to do.