Is redundancy pay taxed? The £30,000 rule explained

The short answer: the first £30,000 of a genuine redundancy payment is tax-free, with no National Insurance either. Anything above £30,000 is taxed at your normal rate, but still has no employee National Insurance. The catch is that a lot of what arrives in your final pay isn’t redundancy pay at all. Notice pay, holiday pay and wages are taxed in full, even when they’re paid in the same lump sum.

What’s tax-free and what isn’t

Your leaving package is usually made up of several parts, and each is taxed differently:

The £30,000 is one limit for the whole job, not per part. Statutory pay, enhanced pay and any ex-gratia sum are added together, and the limit applies once. It also applies once per job, so instalments paid over several months or across two tax years still share the same £30,000.

How much you keep

Up to £30,000 you keep every penny. Above it, the excess is added to your other income for the year and taxed at whatever rate that lands in. So the same payout is worth less to someone who earned more before they left:

Watch the £100,000 line. If your earnings plus the taxable part of your payout go above £100,000, you start losing your personal allowance and pay an effective 60% on that slice. That’s exactly when paying some of it into a pension, covered below, makes the biggest difference.

Your employer pays something too. On anything above £30,000 they pay 15% employer National Insurance, which is one reason they may be open to paying the excess into your pension instead.

The notice pay trap

This is where most surprise tax bills come from. Since April 2018, all pay in lieu of notice is taxed as earnings, whatever your contract says. If you aren’t asked to work your notice, your employer has to work out the basic pay you would have earned during it (HMRC calls this post-employment notice pay) and tax it like wages, before anything else can use the £30,000 limit.

So a payout labelled “£35,000 settlement” might really be £8,000 of notice pay, taxed in full, plus £27,000 of tax-free compensation. Here’s what £5,000 is worth to you depending on what it’s called:

For a basic-rate taxpayer, £5,000 of notice pay leaves about £3,600. For a higher-rate taxpayer it’s about £2,900. The same £5,000 as redundancy pay, inside the limit, is all yours. Our guide to pay in lieu of notice goes through how it’s worked out.

Taxed too much after your P45?

If any taxable part of your package is paid after your employer has given you your P45, they must tax it on code 0T on a month 1 basis. That means no personal allowance and only a twelfth of the basic-rate band, so a chunk of it is taxed at 40% or even 45% even if you’re a basic-rate taxpayer.

Say £10,000 of taxable pay arrives after your P45. On 0T month 1, about £3,372 is deducted. If you earned £20,000 in that tax year before leaving, the tax really due on it is about £2,000. That’s roughly £1,372 too much, and it’s yours to claim back:

• Starting a new job in the same tax year: give your new employer your P45 and the overpayment usually comes back through payroll.
• Out of work and not claiming benefits: claim from HMRC with form P50 after four weeks without work.
• Self Assessment: it’s corrected on your tax return.
• Otherwise: HMRC should spot it after the tax year ends and send a P800 calculation and refund.

Tax-free redundancy pay shouldn’t be on your P45 at all, and nothing within the £30,000 should have tax taken off. If it has, ask your employer’s payroll team to correct it first.

Timing can save you money

Redundancy pay is taxed in the tax year it’s paid, not the year you leave. If you’re leaving in February or March and the payout will be well over £30,000, getting it paid after 6 April puts the taxable part against a fresh personal allowance and basic-rate band. If you then have months without work, much of it may be taxed at 20% instead of 40%. Ask your employer whether the payment date can move. They don’t have to agree, but many will.

Paying the excess into your pension

If your employer pays part of your package straight into your pension, there’s no Income Tax or National Insurance on it at all. For a higher-rate taxpayer, that turns 60p in every pound into the full pound:

There are limits. Contributions count towards your annual allowance, normally £60,000 a year, though you may be able to use unused allowance from the last three years. The money is locked away until you can access your pension, and you pay tax when you draw it, apart from the usual 25% tax-free part. Our guide to redundancy and your pension covers this in more detail.

Check your final payslip

• Is each part listed separately: redundancy, notice, holiday, wages?
• Has tax been taken off anything within the first £30,000 of redundancy pay? It shouldn’t have been.
• Has National Insurance been taken off the redundancy part? It shouldn’t have been, even above £30,000.
• Was any of it paid after your P45, on code 0T? Expect a refund if so.

To see what the law says you’re owed, use the redundancy pay calculator. For your monthly pay in a new job, try the take-home pay calculator.

Figures use 2026/27 Income Tax and National Insurance for England, Wales and Northern Ireland. Scotland has different Income Tax bands. This is general information, not tax advice.