What tax is payable on redundancy payments?

What counts as redundancy pay?

Redundancy pay may be: 

• Statutory redundancy pay 
• Enhanced redundancy pay 
• Non-contractual termination payments 
• Pay in lieu of notice (PILON) 

Is redundancy tax payable?

Redundancy payments will either be fully taxable, partially taxable, or fully exempt depending on the nature and the amount of the payment. In the UK, the first £30,000 of qualifying redundancy or termination payments is usually tax-free. Any amount above £30,000 is typically subject to income tax and may also attract National Insurance Contributions (NICs). 

Planning is important as a significant redundancy payment can take your income above £100,000. This is where you start losing your tax-free allowance and can suffer an effective tax rate of 60%. Furthermore, you will need to register for self-assessment with HMRC and file a tax return.

What parts of a redundancy package are taxed differently? 

Fully taxable  

Unpaid wages, holiday pay, bonuses, payments for restrictive covenants e.g. non-compete clauses and PILONs are all fully taxable.  

PILON is a lump sum paid if you do not have to work your notice period and is in lieu of the salary you would have received for that period.  

Fully exempt 

The first £30,000 of statutory redundancy pay, enhanced redundancy pay and benefits in kind should be fully tax exempt, along with employer pension contributions as part of a termination payment, legal costs paid to a solicitor on your behalf and termination payment related to injury, illness or disability. 

Partially taxable 

Any further statutory or enhanced redundancy pay or benefits in kind over the £30,000 threshold are usually taxable. 

It is your employer’s responsibility to tax your termination payment correctly and therefore the employer bears the risk of tax and penalties if the treatment is wrong. However, it is important to be aware of these points.

How does my employer deal with any income tax and NICs due on redundancy pay?

As with your wages, your employer should deal with the tax and NICs due on any taxable parts of your redundancy package. Income tax and employees’ NICs should be deducted from your payments through PAYE where relevant and paid over the HMRC on your behalf. 

When you are made redundant, your employer should issue you with form P45.

The exact treatment and any action you need to take will depend on the timing of the payment.  

Payment made before your employment ends 

If your redundancy payment is made before you leave your job and before your employer issues you with form P45, any taxable amounts, such as unpaid wages and any part of a redundancy payment over £30,000, should be included in your final pay and you will be taxed using your normal tax code.

Payment after your employment ends

If your taxable redundancy payment is made after you leave your job and your employer has already issued form P45, your employer will use 0T tax code against any taxable amounts. This means you will be treated as having no personal allowance on a week 1/month 1 basis. The employer will take off tax at the appropriate rates before paying you the balance.

Remember, this will only affect you to the extent that your package contains taxable elements, such as, unpaid wages, or if your redundancy payment is over £30,000.

Will the tax my former employer deducts be correct?

If your redundancy payment is made before your employment ends and you do not gain employment again within that tax year, you may have overpaid tax. It will also depend on things like how much of your termination package was taxable, how accurate the tax code your former employer used was and your other tax affairs. The scale of the refund will also depend on how far through the tax year you were made redundant.

If your redundancy payment is made after your P45 has been issued and your employer applies the tax code 0T, you are at high risk of overpaying tax. It will depend on:

• how taxable your termination payment is and
• the level of your other taxable income in that tax year.

How do I claim a tax refund?

Employment

If you start a new job within the same tax year after you’ve been made redundant, make sure you give your new employer your P45 as quickly as possible. Any tax under or overpayment should then be corrected through the PAYE system and adjusted through your payslips. If you’re on an emergency tax code, any under or overpayment may not be fully settled until the tax year has ended and HMRC are able to process all your pay and tax information.

Self employed

Alternatively, if you have started your own business or you're completing a tax return for another reason (rental income for example), you should include the taxable elements of your redundancy payments on your tax return, and your over or under payment will be dealt with this way.

Unemployed

If you are claiming jobseeker's allowance (JSA) or universal credit (UC) – you may need to take your P45 to the Jobcentre when you attend your interview. It is not required when you make your online claim for either JSA or UC prior to the in-person interview. 

If you have an HMRC personal tax account, you can claim a tax refund this way. If you do not have an account, you can set one up here.

Please note, JSA is taxable but UC is not taxable.

If you are not claiming JSA or UC and will be unemployed for over four weeks, you can claim a tax refund via Form P50 (claim for repayment of tax when you have stopped working) by completing the online claim form here. 

What if I do not receive the redundancy payment immediately?

You will be taxed on the redundancy payment in the tax year that you receive it, even if you were made redundant in an earlier tax year.

The £30,000 limit applies to one job and can be carried forward to be used against any later redundancy payments from the same job.

Any income tax or NICs that is payable on any part of a redundancy package paid later will be charged at the rates in force when you receive the payment.

How are pension contributions paid as part of my redundancy package treated?

A payment into a registered pension scheme or an employer-financed retirement benefits scheme (EFRBS) as part of the termination of employment is fully exempt from tax subject to your annual allowance. Making a termination payment to approved schemes, rather than to the employee directly, is very effective tax planning and is commonly used.

Alternatively, you could make personal pension contributions in the same tax year, subject to the level of your UK earnings and annual allowance. The annual allowance is presently £60,000 (2026/27) but this could reduce to £10,000 depending on your level of income. In addition, you may have unused allowance you can bring forward from previous years.

Do you need to report redundancy pay to HMRC? 

Any income tax and NICs due on your redundancy pay should be taken care of through PAYE by your former employer. But there are some circumstances where you may need to file a self-assessment tax return and report the payment: 

• you have multiple income sources 
• you know the tax deducted was wrong  

How TaxAssist accountants can help

If you’ve been made redundant, we can check your tax calculations and help you get back any tax you have overpaid. We can also prepare your tax return if it turns out you need one.

If you’ve since started a business, we can also help get the business registered, help you with your bookkeeping and VAT returns, prepare the year end accounts and tax returns. 

Last updated: 27th July 2026