Is redundancy pay taxed?

The first £30,000 of a genuine redundancy payment can be paid free of Income Tax and National Insurance. That covers statutory redundancy pay and any extra redundancy or compensation money your employer pays for losing the job. Anything above £30,000 is taxed as income, though employee National Insurance is still not due on it. Payments that are really wages, such as notice pay, holiday pay and arrears, are taxed in full whatever the total.

What counts towards the £30,000

The £30,000 exemption applies to payments made because your job ended, which HMRC calls termination payments. In a public sector redundancy that usually means:

• statutory redundancy pay
• enhanced redundancy pay under a sector scheme or local policy
• a compensation payment under a settlement agreement, where it is genuinely for losing the job

The limit is £30,000 in total per employment, not per payment. If you get £18,000 of enhanced redundancy pay and a £15,000 settlement payment, only £3,000 is taxable.

Statutory redundancy pay itself needs 2 years’ continuous service. It is worked out at half a week’s pay for each full year under 22, one week’s pay for each year aged 22 to 40, and one and a half weeks’ pay for each year aged 41 or over. Weekly pay is capped at £751 and the maximum statutory payment is £22,530 for redundancies on or after 6 April 2026. Most public sector staff are entitled to more under their own sector’s rules, and the redundancy rights guide explains the basics.

What is taxed in full

These are earnings, so they go through PAYE with Income Tax and NI deducted, and they do not use up any of the £30,000:

• your normal salary up to the leaving date
• pay in lieu of notice, whether or not your contract mentions it
• payment for untaken holiday
• arrears of pay, overtime or bonuses owed
• any payment you were contractually entitled to anyway

Notice pay is the one people most often get wrong. Under the current rules, all pay in lieu of notice is treated as earnings, even if it is paid as part of a lump sum labelled as compensation. Your employer should split the package on the final payslip or in a letter. If it does not, ask payroll for the breakdown. The holiday pay and tax guide covers untaken leave.

A worked example

Say a council worker in England earns £36,000 and leaves on 30 September with a package of £45,000. The letter breaks it down as:

Element	Amount	Tax treatment
Pay in lieu of 3 months’ notice	£9,000	Taxed and NI deducted as normal pay
Untaken holiday	£1,000	Taxed and NI deducted as normal pay
Enhanced redundancy pay	£35,000	First £30,000 tax-free; £5,000 taxed, no employee NI

Of the £45,000, £30,000 is paid gross. The £15,000 that is taxable is added to this year’s income. With six months of salary (£18,000) already paid, total taxable income for the year is £33,000, all within the basic rate band, so the taxable part is taxed at 20 per cent. Had the taxable part pushed income over £50,270, some of it would be taxed at 40 per cent.

On the £5,000 of redundancy pay above the limit, the employer pays Class 1A NI at 15 per cent, but nothing comes off your pay for NI.

How it is paid and why the tax may look wrong

Where the termination payment is made before your P45 is issued, payroll includes it on your final payslip and uses your normal tax code. Where it is paid after the P45, the taxable part is taxed using a 0T code on a non-cumulative basis, which usually takes too much because no allowance is given.

If you overpaid tax because of how the payment was made, you can claim the excess back. If you start another job in the same tax year, the new employer’s payroll usually corrects it. If you do not work again that year, you can claim through gov.uk; our guide to claiming a tax refund explains the routes.

Pensions and early retirement

Some public sector schemes let staff above a minimum age who are made redundant take their pension early without reduction, with the employer paying the cost. The pension and any lump sum from the scheme are not part of the redundancy payment and have their own tax rules. Pension tax-free cash is separate from the £30,000 redundancy exemption. The early retirement guide covers how the main schemes handle this.

Continuous service across public sector employers can increase what you are paid under sector schemes, for example between NHS employers, but how it is counted depends on the scheme. See continuous service in the public sector.

Where to get help

If you think a package has been split wrongly for tax, raise it with the employer’s payroll or HR team first. For questions about whether the redundancy itself is fair, ACAS and your trade union are the places to go. For a tax problem that payroll cannot fix, contact HMRC. A settlement agreement must be reviewed by an independent adviser for it to be binding, and that adviser can also check the tax split.