What does the £30,000 tax-free redundancy allowance cover?

Relevant termination awards - statutory redundancy pay, enhanced contractual redundancy pay, ex gratia compensation for loss of office. Section 403 ITEPA 2003. It does NOT cover PILON, PENP, holiday pay, contractual bonuses or salary earned before termination.

Is PILON covered by the £30,000 allowance?

No. PILON is always chargeable to income tax as earnings under section 62 (contractual) or section 402D (via PENP). It does not benefit from the £30,000 threshold in section 403 and does not reduce the amount of the threshold available for the ex gratia portion.

Does the £30,000 include employer NI?

Post-April 2020, employer Class 1A NI is due on any relevant termination award above £30,000 (currently 15 per cent for 2025-26). Falls on the employer, not the employee. Affects negotiation because it raises the employer's total cost of the package.

Can I split my termination package across tax years to maximise the £30,000?

The £30,000 is per termination, not per tax year. Splitting the payment does not create two separate £30,000 thresholds. Marginal-rate considerations may still apply where the payment straddles a tax year and pushes into a higher bracket.

Are restrictive covenant payments within the £30,000?

Generally no. Payments in return for restrictive covenants are chargeable as earnings under section 225 ITEPA 2003 and don't benefit from the £30,000 threshold. Settlement agreements should identify covenant payments separately.

£30,000 Tax-Free Redundancy Allowance Explained UK (2026)

Why this matters right now

The £30,000 threshold has not been uprated since 1988 - meaning inflation has eroded its real value by ~70 per cent over 37 years. For anyone receiving a redundancy or settlement package today, the threshold covers a materially smaller portion of the total than it once did. Understanding exactly what falls within it (and what doesn't) is the difference between structuring a package well and losing thousands to unnecessary tax.

What the £30,000 covers

The threshold in section 403 ITEPA 2003 applies to "relevant termination awards" - broadly, payments compensating the employee for the loss of employment. Covered:

Statutory redundancy pay (section 135 Employment Rights Act 1996).
Enhanced contractual redundancy pay above the statutory formula.
Ex gratia payments compensating for loss of office.
Damages for wrongful dismissal (in some circumstances - see below).
Discrimination compensation (in some circumstances).

What the £30,000 does NOT cover

This is where most misunderstandings sit. The following are chargeable to income tax as earnings and do NOT reduce the £30,000 threshold:

PILON (contractual or non-contractual) - always chargeable as earnings.
PENP - the formula-derived amount treated as earnings under section 402D ITEPA 2003.
Accrued but untaken holiday pay - earnings.
Contractual bonuses accrued to leaving date - earnings.
Salary earned before termination - obviously earnings.
Restrictive covenant payments (in most cases) - earnings.
Damages for breach of contract that are chargeable as earnings - earnings.

Order of operations - PENP first, then £30,000

Post-April 2018, the correct order is:

Calculate PENP under section 402D. PENP is chargeable as general earnings.
Deduct PENP from the total termination payment.
The remainder ("relevant termination awards") can use the £30,000 threshold.
Amounts above £30,000 are chargeable as earnings.

PENP is calculated FIRST, before the £30,000 threshold is applied. This is a common employer error - some payroll systems apply the threshold before PENP, over-taxing the employee.

Worked example 1 - Redundancy with statutory + ex gratia

Rob is made redundant. Package: £8,000 statutory redundancy + £15,000 ex gratia + £4,000 accrued holiday. No PILON.

Relevant termination awards: £8,000 + £15,000 = £23,000 (holiday pay is earnings, not termination award).
PENP: assume £0 (contractual notice fully worked).
£23,000 falls within £30,000 threshold → tax-free.
£4,000 holiday pay: taxed as earnings.
Net after tax (assuming higher rate on holiday): approximately £27,400.

Worked example 2 - Redundancy with PILON

Emma is made redundant. Package: £5,000 statutory + £20,000 ex gratia + £12,000 PILON + £2,000 holiday. Total: £39,000.

PILON £12,000: chargeable as earnings (contractual or non-contractual - PENP applies).
PENP calculation: assume the £12,000 PILON is contractual and matches the formula figure exactly - PENP = £0.
Relevant termination awards: £5,000 + £20,000 = £25,000.
£25,000 within £30,000 threshold → tax-free.
PILON £12,000 + holiday £2,000: taxed as earnings.
Net after higher-rate tax on the £14,000 earnings portion: total net approximately £30,600.

Worked example 3 - Large package hitting the cap

Diane is a senior executive. Package: £15,000 statutory + £65,000 ex gratia + £20,000 PILON + £5,000 holiday. Total: £105,000.

PILON £20,000: earnings.
PENP: assume aligned with PILON, PENP = £0.
Relevant termination awards: £15,000 + £65,000 = £80,000.
£30,000 threshold applied to the £80,000: first £30,000 tax-free, remaining £50,000 taxed as earnings.
Employer Class 1A NI due on the £50,000 above £30,000 (a post-April 2020 rule - falls on employer, not employee).
Total earnings-taxed: £50,000 termination excess + £20,000 PILON + £5,000 holiday = £75,000 taxable.

Pension routing at this level is highly tax-efficient. See PILON pension contributions.

Employer NI on termination payments above £30,000

Post-April 2020, employer Class 1A National Insurance is due on any relevant termination award above £30,000. Current rate (2025-26): 15 per cent. Falls on the employer, not the employee - but affects negotiation because the employer's total cost of the package rises above the headline figure.

Example: an employer offering £50,000 ex gratia (£20,000 above threshold) has an additional £3,000 NI cost. The employer's all-in cost is £53,000. Understanding this often unlocks scope to negotiate up on the ex gratia side.

How to structure a package for the maximum benefit

Maximise the ex gratia and statutory portions (fall within £30k).
Minimise the PILON portion (fully taxable via PENP either way).
Route sums above £30k into pension where possible (bypasses both PAYE and NI).
Take contractual bonus separately if lower rate (may benefit from lower tax band).
Consider payment timing across tax years (spreading may reduce marginal rate).

Pension routing above the £30k allowance is the single most valuable technique for senior packages. See PILON pension contributions.

Restrictive covenant payments

Payments made in return for restrictive covenants (e.g. non-compete undertakings that go beyond the standard contractual restrictions) are generally chargeable to income tax as earnings under section 225 ITEPA 2003. They do NOT fall within the £30,000 threshold. This is a common employer error where a settlement bundles restrictive-covenant payments with ex gratia - the covenant portion should be separately identified.

Where the £30,000 does apply for wrongful dismissal damages

Damages for wrongful dismissal (breach of contract by the employer, typically failure to give proper notice) can fall within the £30,000 threshold IF they represent genuine compensation for the loss of employment rather than earnings for the notice period. Post-April 2018, the PENP formula catches most amounts that represent unworked notice - so the practical scope for wrongful-dismissal damages to fall within £30,000 has narrowed significantly.

Common errors on settlement letters

Applying the £30,000 to the total package including PILON (wrong - PILON is excluded).
Applying PENP after the £30,000 threshold (wrong - PENP is calculated first).
Bundling restrictive covenant payments into "ex gratia" (wrong - covenants are earnings).
Failing to identify contractual bonus separately (bonus is earnings, doesn't reduce £30k).
Not applying the "negative → nil" PENP rule.

Always cross-check with the settlement agreement tax calculator and take independent legal advice before signing.

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Related guides

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Frequently asked questions

What does the £30,000 tax-free redundancy allowance cover?: Relevant termination awards - statutory redundancy pay, enhanced contractual redundancy pay, ex gratia compensation for loss of office. Section 403 ITEPA 2003. It does NOT cover PILON, PENP, holiday pay, contractual bonuses or salary earned before termination.
Is PILON covered by the £30,000 allowance?: No. PILON is always chargeable to income tax as earnings under section 62 (contractual) or section 402D (via PENP). It does not benefit from the £30,000 threshold in section 403 and does not reduce the amount of the threshold available for the ex gratia portion.
Does the £30,000 include employer NI?: Post-April 2020, employer Class 1A NI is due on any relevant termination award above £30,000 (currently 15 per cent for 2025-26). Falls on the employer, not the employee. Affects negotiation because it raises the employer's total cost of the package.
Can I split my termination package across tax years to maximise the £30,000?: The £30,000 is per termination, not per tax year. Splitting the payment does not create two separate £30,000 thresholds. Marginal-rate considerations may still apply where the payment straddles a tax year and pushes into a higher bracket.
Are restrictive covenant payments within the £30,000?: Generally no. Payments in return for restrictive covenants are chargeable as earnings under section 225 ITEPA 2003 and don't benefit from the £30,000 threshold. Settlement agreements should identify covenant payments separately.

Sources and further reading

HMRC EIM13880 - PENP formula — HMRC's definitive statement of the PENP formula.
HMRC EIM13876 - PENP charge to tax — PENP chargeable as general earnings; no £30,000 threshold.
Section 402D ITEPA 2003 — Statutory basis for the PENP formula.
Section 403 ITEPA 2003 — The £30,000 termination-payment threshold.
HMRC EIM14000 - Worked example — HMRC's worked example.
HMRC EIM12960 - £30,000 threshold — HMRC guidance on the £30,000 threshold.

General guide to the UK £30,000 termination-payment threshold. Not tax advice. For your specific package, take independent legal and tax advice before signing any settlement agreement.