Is redundancy pay taxable? The £30,000 rule, notice pay and pensions explained

"Is redundancy pay taxable?" is one of the most searched questions in Britain in any month when a large employer announces job cuts, and the short answer is the one everyone half-remembers: the first £30,000 is tax-free. The longer answer is where the money is. What counts towards the £30,000, what is excluded from it entirely, how the excess is taxed, when it is paid, and whether you can shelter part of it in a pension can together move the final figure by thousands of pounds.

This post walks through all of it, with a worked example, for anyone in the UK receiving a redundancy package in 2026. It applies whether the redundancy is voluntary or compulsory, and it is general information rather than tax advice: the rules are current as I write, but your own position depends on your numbers and should be confirmed with an adviser before you agree anything.

The £30,000 rule

A genuine redundancy payment, meaning money paid because your job has ended and not for work you did, can be received free of income tax and National Insurance up to £30,000. That figure is a lifetime-per-employment limit rather than an annual allowance, and it has not increased since it was set, which is why it now covers a smaller share of a professional's package than it once did.

Three kinds of payment count towards the £30,000. Statutory redundancy pay, the legal minimum from the formula. Contractual redundancy pay, where your contract or a collective agreement promises an enhanced amount. And ex gratia payments, the discretionary sums an employer adds to a voluntary package or a settlement. Add them together, and the first £30,000 of the total is exempt.

What is not covered, and is taxed in full

The mistake that costs people most is assuming everything in the leaving letter shares the exemption. It does not. Several elements are treated as ordinary earnings, taxed at your marginal rate and subject to National Insurance, exactly as if you had worked and been paid.

Notice pay is the one that catches most people. Since 2018 all pay in lieu of notice has been taxable, whether or not your contract has a clause allowing the employer to pay it, so an old trick of leaving notice pay inside the "compensation" figure no longer works. If your letter shows one round number for everything, ask HR to split it into its parts with the tax treatment of each. You are entitled to that breakdown, and you cannot check the tax without it.

How the excess is taxed

Anything above £30,000 in the redundancy element is added to your income for the tax year in which you receive it and taxed at your marginal rate. In 2026/27 that means 20% on income up to £50,270, 40% up to £125,140 and 45% above, with the personal allowance of £12,570 withdrawn by £1 for every £2 of income over £100,000, which creates an effective 60% rate in that band. The excess is also subject to employer's National Insurance, though not to yours.

The employer usually deducts tax on the excess through payroll. If the payment is made after your P45 has been issued, it is often taxed under an emergency code, which can mean too much or too little tax is taken at the time and the balance is settled through your tax return or a later adjustment. Do not treat the figure on the payslip as final until it has been reconciled for the year.

Timing: which tax year the money lands in

Because the excess is taxed as income in the year you receive it, when you receive it matters. A package paid in March, at the end of a full year of salary, stacks on top of eleven months of earnings and is more likely to reach the 40% or 45% bands. The same package paid in April or May, at the start of a year in which you may earn little else, can fall largely in the 20% band. On a £15,000 excess that difference is worth up to £3,000.

You cannot always choose, but the leaving date and the payment date are often negotiable within a settlement agreement, and it is legitimate to ask for a payment date that falls in the new tax year. Ask an adviser to run both scenarios before you agree the date, because it is one of the few tax decisions in redundancy that is genuinely in your hands.

The pension route

The second decision in your hands is the pension. Many employers will agree to pay some or all of the amount above £30,000 directly into your pension as an employer contribution rather than as cash. Paid that way, it does not attract income tax or National Insurance at the point of payment. It sits in your pension, invested, and is taxed only when you draw it, potentially at a lower rate and with a quarter available tax-free under current rules.

The constraint is the annual allowance, currently £60,000 for most people, which caps the total that can go into your pension in a tax year with tax relief. Unused allowance from the previous three years can be carried forward, which often makes room for a larger contribution than the headline figure suggests. The allowance is lower for very high earners and for anyone who has already flexibly accessed a pension, so the arithmetic needs checking against your own record. It also means giving up access to that money until pension age, which is the wrong trade if it is the money you need to live on.

Five things to do before you sign

Why this matters more than it looks

People decide whether to take a package on the gross figure because it is the number in the letter. The decision that actually holds up is made on the net figure, because that is the money that will pay the mortgage while you find the next income. On a mid-sized professional package, the gap between the two runs from a few thousand pounds to more than ten, and two of the levers that close it, the payment date and the pension route, are yours to pull if you ask before signing.

Once you have your net figure, the next step is the runway calculation and the decision formula in the full redundancy guide, which is built on exactly this number.

This is general information, not tax or financial advice. The figures apply to the 2026/27 tax year and the rules are detailed; your own treatment depends on your income, your tax code, your pension history and the timing of payments. Confirm your position with a qualified adviser before you agree a settlement, and check GOV.UK for the current rules.

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