Being made redundant brings financial uncertainty, but understanding how your redundancy payment is taxed can help you plan ahead.
The good news is that up to £30,000 of genuine redundancy pay is completely tax-free. Other elements of your leaving package—like holiday pay and payment in lieu of notice—are taxed differently.
Many people who receive redundancy payments end up overpaying tax, often because of emergency tax codes or because they stop working partway through the tax year.
This means you could be owed a refund of income tax from HMRC.
This guide explains exactly how redundancy payments are taxed, which parts of your package count toward the £30,000 threshold, and how to claim back any tax you have overpaid.
Key Takeaways
- The first £30,000 of genuine redundancy pay is completely tax-free
- Redundancy pay is not subject to National Insurance, even amounts above £30,000
- Holiday pay, unpaid wages, and payment in lieu of notice (PILON) are always taxable
- Non-cash benefits like company cars count toward the £30,000 threshold
- You may be owed a tax refund if you stop working partway through the tax year
- You can claim a refund using form P50 if you have been unemployed for four weeks or more
Understanding the £30,000 Tax-Free Threshold
The most important rule for redundancy tax is the £30,000 exemption.
This applies to genuine compensation for losing your job—not to payments you would have received anyway as part of your employment.
What Counts Toward the £30,000 Limit
The following payments all count toward your £30,000 tax-free allowance:
- Statutory redundancy pay
- Enhanced or contractual redundancy pay above the statutory minimum
- Ex-gratia payments (goodwill payments from your employer)
- Non-cash benefits given as part of your redundancy package (valued at their cash equivalent)
What Does Not Count Toward the £30,000 Limit
These payments are taxed separately and do not use up your £30,000 allowance:
- Unpaid wages or salary arrears
- Holiday pay for untaken leave
- Payment in lieu of notice (PILON)
- Bonuses you earned before redundancy
- Commission payments
This distinction matters because these taxable payments do not reduce your £30,000 allowance.
You get the full £30,000 tax-free on your actual redundancy compensation, plus separate taxation on the other elements.
Example: How the £30,000 Threshold Works
Sarah receives the following when made redundant:
- Statutory redundancy pay: £12,000
- Enhanced redundancy pay: £20,000
- Holiday pay: £2,500
- PILON: £4,000
Her total redundancy compensation is £32,000 (statutory plus enhanced). The first £30,000 is tax-free, so only £2,000 is taxable as income.
Her holiday pay (£2,500) and PILON (£4,000) are taxed separately as normal earnings. These do not affect her £30,000 redundancy allowance.
Payments That Are Always Taxable
Not everything in your redundancy package qualifies for the £30,000 exemption.
Understanding which payments are always taxable helps you calculate your actual take-home amount.
Payment in Lieu of Notice (PILON)
If your employer pays you instead of requiring you to work your notice period, this payment is fully taxable.
HMRC treats PILON as the earnings you would have received if you had worked your notice. This means:
- Income tax is deducted at your normal rate
- National Insurance contributions apply
- The payment goes through PAYE like regular salary
This applies whether PILON is written into your contract or offered as a one-off arrangement.
Holiday Pay
Any untaken holiday paid out when you leave is taxable as normal earnings. This includes:
- Accrued holiday you did not take
- Holiday entitlement for the current year up to your leaving date
- Any contractual holiday above the statutory minimum
Holiday pay is subject to both income tax and National Insurance.
Unpaid Wages and Bonuses
Any salary, wages, or bonuses you earned before your redundancy date are taxed as normal income. This includes:
- Salary owed up to your leaving date
- Commission earned before redundancy
- Performance bonuses you qualified for
- Overtime payments
Non-Cash Benefits
If you receive non-cash benefits as part of your redundancy package—such as keeping your company car or laptop—HMRC assigns a cash value to these items.
This value is added to your redundancy payment for tax purposes. If it pushes your total over £30,000, you will pay tax on the excess.
For example, if you receive £28,000 redundancy pay plus a company car valued at £5,000, your total is £33,000. You would pay tax on £3,000.
How Tax Is Calculated on Redundancy Pay Over £30,000
If your redundancy payment exceeds £30,000, your employer deducts tax on the excess through PAYE before paying you.
The Calculation Process
Your employer calculates tax on the taxable portion of your redundancy as follows:
- Add up all payments that count toward the £30,000 threshold
- Subtract £30,000 to find the taxable amount
- Apply your marginal income tax rate to the taxable amount
National Insurance on Redundancy Pay
Importantly, redundancy pay is not subject to National Insurance contributions—even the portion above £30,000.
This is a significant advantage. While you pay income tax on amounts over £30,000, you do not pay the additional 8% or 2% National Insurance that would normally apply to earnings.
Example: Tax on a £50,000 Redundancy Payment
Tom receives £50,000 redundancy pay. His calculation works as follows:
- Total redundancy pay: £50,000
- Tax-free amount: £30,000
- Taxable amount: £20,000
If Tom is a basic rate taxpayer (20%), he pays £4,000 income tax on the £20,000.
If Tom is a higher rate taxpayer (40%), he pays £8,000 income tax on the £20,000.
Tom pays no National Insurance on any of the redundancy payment.
When You Might Overpay Tax
Many people overpay tax when made redundant.
This happens for several reasons, and understanding them helps you identify whether you are owed a refund.
Emergency Tax Codes
Your employer may process your final payment using an emergency tax code (such as 0T or BR).
These codes do not account for your personal allowance and often result in higher tax deductions than necessary.
If your redundancy payment is processed on an emergency code, you have likely overpaid and can claim a refund.
Stopping Work Partway Through the Tax Year
PAYE is designed to spread your tax liability evenly across the year.
If you stop working partway through the tax year and do not return to work, you may have paid more tax than you actually owe.
For example, if you earn £30,000 in the first six months of the tax year and then are made redundant, your employer has been deducting tax as if you would earn £60,000 for the full year.
If you do not work again that tax year, you will have overpaid.
Income Below Your Personal Allowance
If your total income for the tax year (including any taxable redundancy elements) falls below the personal tax free allowance, you should not pay any income tax.
Any tax deducted would be refundable.
How to Claim a Tax Refund After Redundancy
If you believe you have overpaid tax, there are several ways to claim a refund depending on your circumstances.
If You Are Not Returning to Work This Tax Year
If you have been unemployed for four weeks or more and are not claiming taxable benefits (like Jobseeker’s Allowance), you can claim a refund using form P50.
To claim via P50:
- Complete the form online through your HMRC Personal Tax Account, or download and post it
- Include Parts 2 and 3 of your P45 from your former employer
- HMRC will process your claim and issue a refund, typically within 14 days
You cannot use form P50 if you are still registered with an employment agency or expecting further payments from your employer.
If You Start a New Job
If you start a new job soon after redundancy, give your P45 to your new employer. Any overpaid tax should be refunded automatically through your new salary as your tax code adjusts.
If You Claim Taxable Benefits
If you are claiming Jobseeker’s Allowance or other taxable benefits, send Parts 2 and 3 of your P45 to the benefits office. Any tax refund will be processed through your benefit payments.
After the Tax Year Ends
If you do not claim during the tax year, HMRC will review your PAYE records after April. If they identify an overpayment, they will send you a P800 tax calculation.
Since May 2024, HMRC often requires you to actively claim your P800 refund online rather than sending it automatically.
Check your HMRC Personal Tax Account for any notifications.
The Connected Employer Rule
The £30,000 tax-free threshold applies per employer. HMRC has rules about connected employers that can affect your allowance.
When Employers Are Connected
If you receive redundancy payments from employers that are connected—for example, companies within the same corporate group—you may only have one £30,000 allowance to use across all payments.
Employers are connected if:
- One company controls the other
- Both companies are controlled by the same person or group
- They are part of the same corporate structure
Example: The Connected Employer Rule
Chris works for Heavy Rail Ltd and is made redundant, receiving £20,000. He then joins Light Trucking Ltd (a subsidiary of Heavy Rail Ltd) and is made redundant again, receiving £15,000.
Because the employers are connected, Chris has only one £30,000 allowance.
The first £20,000 is tax-free. Of the second payment, only £10,000 is tax-free, and £5,000 is taxable.
Unconnected Employers
If you receive redundancy from genuinely separate, unconnected employers, each comes with its own £30,000 allowance.
Jack is made redundant from Company A with £30,000 (tax-free). He later joins unconnected Company B and is made redundant with £15,000.
In theory this is also tax-free because Company B has a separate £30,000 allowance.
Tax-Efficient Strategies for Redundancy Pay
If your redundancy package exceeds £30,000, there are legitimate ways to reduce your tax liability.
Pension Contributions
One of the most effective strategies is asking your employer to pay some of your redundancy directly into your pension.
Employer pension contributions:
- Do not count toward the £30,000 threshold
- Are not subject to income tax or National Insurance
- Benefit from tax relief within your pension
This works best for amounts over £30,000 that would otherwise be taxable. You must stay within pension annual allowance limits (currently £60,000 for most people).
Your employer must agree to this arrangement, and it needs to be set up before your final payment is processed.
Timing of Payments
If your redundancy payment is made across two tax years, each portion is taxed in the year you receive it. This can sometimes reduce your overall tax bill if it keeps you in a lower tax bracket.
For example, receiving £20,000 in March and £20,000 in April (the next tax year) may result in less tax than receiving £40,000 in one go—particularly if you do not work much in the second year.
Review Your Tax Code
Before your final payment, check that your employer is using the correct tax code. If an emergency code is being applied, contact HMRC to request correction.
This can prevent overpayment in the first place.
What to Do With Your Redundancy Money
Once you receive your redundancy payment, consider how to use it wisely—particularly the tax implications of different choices.
Savings and Investments
Interest earned on savings is taxable income. If your redundancy payment pushes you into a higher tax bracket, the personal savings allowance may be reduced (from £1,000 to £500 for higher rate taxpayers).
Consider using ISA allowances to shelter investment returns from tax.
Paying Off Debts
Using redundancy money to pay off debts has no direct tax implications and reduces your ongoing financial commitments. High-interest debts like credit cards may be a priority.
Starting a Business
If redundancy leads you to self-employment, you will need to:
- Register with HMRC for Self Assessment
- Understand your new tax obligations (income tax, Class 2 and Class 4 National Insurance)
- Keep records of business income and expenses
Any redundancy pay used as start-up capital is not taxed again—it has already been through the redundancy tax rules.
Redundancy and Income Tax FAQs
Q1: Is redundancy pay taxable in the UK?
A: The first £30,000 of genuine redundancy pay is tax-free. Any amount above £30,000 is subject to income tax at your marginal rate. However, redundancy pay is not subject to National Insurance contributions, even amounts over £30,000. Other elements like holiday pay and PILON are taxed as normal earnings.
Q2: Does holiday pay count toward the £30,000 redundancy threshold?
A: No, holiday pay is taxed separately as normal earnings and does not count toward your £30,000 tax-free redundancy allowance. The same applies to payment in lieu of notice (PILON), unpaid wages, and bonuses. These are taxed through PAYE with income tax and National Insurance deductions.
Q3: How do I claim a tax refund after redundancy?
A: If you have been unemployed for four weeks or more and are not claiming taxable benefits, you can use form P50 to claim a refund. Complete it online via your HMRC Personal Tax Account or post it with Parts 2 and 3 of your P45. If you start a new job, give your P45 to your new employer and overpaid tax should be refunded through your salary.
Q4: Can I reduce tax on redundancy pay over £30,000?
A: Yes, one effective strategy is asking your employer to pay some of your redundancy directly into your pension. Employer pension contributions do not count toward the £30,000 threshold and are not subject to income tax or National Insurance. Your employer must agree, and you must stay within pension annual allowance limits.
Q5: Do I get a new £30,000 allowance if I am made redundant twice?
A: It depends on whether the employers are connected. If you are made redundant by genuinely separate, unconnected employers, each redundancy comes with its own £30,000 tax-free allowance. If the employers are connected (such as companies in the same group), you may only have one £30,000 allowance across all payments.
