What to do with redundancy money

Step 1: confirm the figures

Before any decisions, confirm what you’ve actually been paid. The final pay packet typically includes statutory redundancy, any ex-gratia or enhanced amount, PILON for the unworked notice (if applicable), and unused holiday paid out. Each has its own tax treatment. The settlement agreement calculator and redundancy pay calculator let you sanity-check the gross figures; the redundancy tax estimator gives a rough net.

Errors are common, particularly when the package combines statutory redundancy with PILON and ex-gratia. The £30,000 allowance is meant to cover statutory plus ex-gratia, combined; if your employer has allocated it incorrectly the tax bill changes. Worth ringing payroll if the numbers don’t reconcile.

Step 2: protect the runway

The single most important decision is how long the money needs to last. For most UK office workers in healthy sectors, a focused job search takes 1-3 months from start to offer. For senior or specialist roles, 3-6 months. For a sector switch or retraining, 6-12 months.

Whatever your target runway, ring-fence enough of the lump sum to cover essential monthly outgoings for that period. Move it into a high-interest easy-access savings account (the difference between 0% in a current account and 4-5% in a savings account is £30-£50 per month per £10,000). Set up a standing order from the savings account back to your current account each month, replacing what would have been salary. The redundancy runway calculator handles this maths.

Step 3: clear high-interest debt

High-interest debt is the next priority. Credit card balances at 20%+ APR, store cards, payday lending, overdrafts running close to the limit. The interest cost is more than you’d earn anywhere else, and reducing the debt also reduces your essential monthly outgoings during the runway period. Two-for-one.

Lower-interest debt is usually not worth accelerating in the same way. Mortgage rates of 4-6% are well below the long-run return on stocks (which is where any “invest instead” alternative ends up), and the lump sum is more valuable as immediate runway than as a small saving on long-term interest. Same logic for student loans on most UK plans.

Step 4: top up the emergency fund

Once the active runway is set, the next priority is the underlying emergency fund. For most UK households, 3-6 months of essential spending in cash is the floor; longer if you’re self-employed, have dependants, or work in a volatile sector. The emergency fund calculator gives a tailored figure.

The two pots (runway and emergency fund) overlap in practice. Once you have a new job, what was “runway” becomes “emergency fund”. So the order in the early months matters less than getting both covered before spending any of the lump sum on longer-term goals.

Step 5: deal with the longer-term options

With the runway covered, debt cleared, and emergency fund topped up, what’s left is genuinely optional. Three common categories of use:

• Pension top-up. Employer pension contributions stop when employment ends. Making a one-off personal pension contribution gets tax relief at your marginal rate, which is particularly valuable in the tax year you receive the lump sum (when your overall income may be higher than normal). For higher earners, this can be a significant tax saving.
• Retraining. If the original sector is contracting or you’ve been thinking about a switch, using redundancy money to fund retraining is one of the highest-return uses of the lump sum. See retraining after redundancy.
• Self-employment runway. If you’re considering freelance or contracting, the lump sum bridges the gap between leaving employment and first paid invoice (typically 6-12 weeks for the first contract, then another 30-60 days for payment terms). See going freelance after employment.

What to avoid in the first month

The recurring mistakes: cashing out a pension early (the tax cost is brutal and you lose decades of compound growth); making lifestyle commitments before income is clear (a new car, a house move, an expensive holiday); spending at the pre-redundancy rate “just for a couple of months” until the lump sum is half gone; investing money you might need within 12 months in volatile assets; and taking the first job offered out of money panic at week 3.

None of these is fatal but each costs more than it needs to. A monthly review (15 minutes, once a month) catches drift before it becomes a problem.

Quick-reference decision order

1. Confirm the figures on the final payslip
2. Ring-fence the runway for your expected job-search window
3. Clear high-interest debt
4. Top up the emergency fund to 3-6 months
5. Consider pension top-up for tax relief if you’re a higher-rate taxpayer
6. Allocate to longer-term goals only after all of the above

Frequently asked questions

What's the smartest thing to do with redundancy money?

There's no single right answer, but a sensible order is: top up the emergency fund to cover 3-6 months of essential spending, clear any high-interest debt (credit cards, overdrafts), then split the rest between continuing income replacement and any longer-term plans (retraining, business start-up, pension top-up). The job search is easier when the money side is settled.

Should I pay off my mortgage with redundancy money?

Usually not in one move. The redundancy lump sum is more valuable as runway during a job search than as a small interest saving on a mortgage. Once you're back in steady income, accelerating the mortgage with the leftover is a reasonable second-phase decision.

Should I invest my redundancy money?

Invest only what you don't need for the runway. Money you might need within 12 months should stay in cash (high-interest easy access). Money you genuinely won't need for 5+ years can be invested using a stocks and shares ISA or pension contributions, which both carry tax advantages.

Is redundancy money tax-free?

The first £30,000 of statutory redundancy and any ex-gratia portion is tax-free. PILON and unused holiday are always fully taxable as earnings. The breakdown matters; the settlement calculator on this site does the maths.

General information, not financial advice. For tailored guidance contact MoneyHelper (free) or a regulated financial adviser.

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