Is redundancy pay tax-free?

Statutory redundancy pay is tax-free up to £30,000. Anything above £30,000 is taxable as earnings. The £30,000 allowance is shared between statutory redundancy and any ex-gratia or enhanced redundancy amount. PILON, holiday pay, contractual bonuses, and accrued wages don't use any of the allowance — they're always fully taxable.

Why is PILON taxed in full now?

Before April 2018, non-contractual PILON could sometimes fall within the £30,000 termination payment exemption. HMRC closed that gap with the introduction of Post-Employment Notice Pay (PENP). All PILON, whether contractual or not, is now treated as earnings and fully taxable under PAYE plus National Insurance. The £30k allowance applies only to statutory and ex-gratia portions.

Do I pay National Insurance on redundancy pay?

On the tax-free portion (up to £30,000 of statutory + ex-gratia combined), no — it's free of both tax and NI. On the excess above £30,000, there's income tax but no employee NI (only employer NI). On PILON, holiday pay, and bonuses, you pay both income tax AND employee NI, the same as any normal earnings.

How is the tax actually deducted?

Your employer applies PAYE to the taxable portion of your final pay packet. If the redundancy slice exceeds £30k, the excess is taxed at your marginal rate (often pushing some of it into a higher band for that month). Holiday and PILON are taxed as normal earnings. If the deductions look wrong, contact HMRC; sometimes a Self-Assessment is needed to true things up.

Redundancy Pay Tax Explained (UK 2026)

The £30,000 allowance explained

The £30,000 figure comes from section 401-403 of the Income Tax (Earnings and Pensions) Act 2003. It’s a tax-free allowance on ‘termination payments’ — that is, payments made because employment is ending, rather than as payment for work done.

Statutory redundancy is always a termination payment by definition. Ex-gratia or enhanced redundancy on top of statutory is also a termination payment. PILON is no longer a termination payment for tax purposes (since 2018 it’s treated as Post-Employment Notice Pay, which is earnings). Holiday pay, salary, and contractual bonus are not termination payments either; they’re straightforward earnings.

How the allowance is allocated

When a settlement combines statutory redundancy and ex-gratia, the £30,000 allowance covers them in the order they appear: statutory first, then ex-gratia. Some examples:

Statutory £8k + ex-gratia £15k = £23k total. All within the £30k cap. Tax-free portion: £23k. Taxable termination excess: £0.
Statutory £25k + ex-gratia £20k = £45k total. Allowance covers full £25k statutory + £5k of ex-gratia (=£30k tax free). Taxable termination excess: £15k of ex-gratia.
Statutory £35k + ex-gratia £0 = £35k total. Allowance covers first £30k of statutory. Taxable termination excess: £5k of statutory.

The PENP rules (PILON tax)

Post-Employment Notice Pay applies to any PILON paid since 6 April 2018. HMRC’s rule is broadly: you can’t dress up payment for unworked notice as a tax-free termination payment. So all PILON is taxed under PAYE and subject to employee NI, regardless of how the contract is worded or whether it’s described as PILON or as part of an ex-gratia.

The formula HMRC uses is roughly: PENP = (basic pay over the notice period) - (any amounts already taxed as earnings). Most simple cases are just ‘PILON = unworked notice × basic pay’, which is what the PILON calculator shows. Senior cases with bonuses and benefits in kind can be more complex; if the package is large, get a solicitor or accountant to model it.

National Insurance

The tax-free portion (up to £30k of statutory + ex-gratia combined) is also NI-free for the employee. The portion above £30k is subject to employer NI but not employee NI. PILON, holiday and bonus are all fully NI-able like normal earnings for the employee.

Worked example

Sarah is 45, with 10 years of service and £600 weekly pay. She’s being made redundant.

Statutory redundancy: 12.5 weeks × £600 = £7,500 → tax-free.
PILON: 12 weeks unworked × £600 = £7,200 → fully taxable.
Holiday pay: 10 days × (£600 / 5) = £1,200 → fully taxable.
Ex-gratia: £5,000 → tax-free (well within remaining allowance).

Total gross: £20,900. Tax-free: £12,500. Taxable as earnings: £8,400. If Sarah’s marginal tax rate is 40% with a 2% NI band, the tax on the £8,400 is roughly £3,300, leaving her with about £17,600 net of the settlement. The settlement agreement calculator on this site does the gross calculation; for the net calculation, work with your payroll or an accountant for accuracy.

What if my package is over £30,000?

The excess above £30k is taxable as earnings under PAYE in the month it’s paid. For larger packages this can push a slice into the higher-rate or additional-rate band for that single month, which is usually fine because your annual tax is reconciled on the basis of the whole year. If you’re moving to a lower-earning role or to no role for several months, you may end up over-taxed on the settlement and get a refund via your tax code or Self-Assessment.

Pension contributions can sometimes be used to soak up a large taxable settlement, particularly if you have unused annual allowance from previous years. Your employer may agree to pay some of the ex-gratia directly into your pension instead, which can be a significant tax saving for high earners. Take advice if the package is large enough to make this worth modelling.

Frequently asked questions

Is redundancy pay tax-free?: Statutory redundancy pay is tax-free up to £30,000. Anything above £30,000 is taxable as earnings. The £30,000 allowance is shared between statutory redundancy and any ex-gratia or enhanced redundancy amount. PILON, holiday pay, contractual bonuses, and accrued wages don't use any of the allowance — they're always fully taxable.
Why is PILON taxed in full now?: Before April 2018, non-contractual PILON could sometimes fall within the £30,000 termination payment exemption. HMRC closed that gap with the introduction of Post-Employment Notice Pay (PENP). All PILON, whether contractual or not, is now treated as earnings and fully taxable under PAYE plus National Insurance. The £30k allowance applies only to statutory and ex-gratia portions.
Do I pay National Insurance on redundancy pay?: On the tax-free portion (up to £30,000 of statutory + ex-gratia combined), no — it's free of both tax and NI. On the excess above £30,000, there's income tax but no employee NI (only employer NI). On PILON, holiday pay, and bonuses, you pay both income tax AND employee NI, the same as any normal earnings.
How is the tax actually deducted?: Your employer applies PAYE to the taxable portion of your final pay packet. If the redundancy slice exceeds £30k, the excess is taxed at your marginal rate (often pushing some of it into a higher band for that month). Holiday and PILON are taxed as normal earnings. If the deductions look wrong, contact HMRC; sometimes a Self-Assessment is needed to true things up.

General information, not tax advice. For your specific situation, contact an accountant or HMRC. Settlement-related tax questions are often worth checking with an employment-law solicitor too.

Redundancy pay tax explained