Redundancy Pay Tax UK 2026/27: £30,000 Tax-Free Threshold Explained

The UK gives redundant employees a £30,000 tax-free allowance on genuine redundancy compensation - but the rules around what counts as "redundancy" for tax purposes catch many people out. Statutory redundancy pay is fully tax-free up to the £30,000 cap. Payment in lieu of notice (PILON), unused holiday pay, and contractual redundancy enhancements often are not.

This guide explains exactly what's tax-free, what's not, and how to read your final payslip.

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The £30,000 rule

Section 401 of the Income Tax (Earnings and Pensions) Act 2003 makes the first £30,000 of "termination payments" tax-free, with the balance subject to income tax at your normal PAYE rates.

A "termination payment" includes:

Statutory redundancy pay - the legal minimum your employer must pay (see calculation below).
Enhanced/contractual redundancy pay - anything your employer pays above the statutory minimum, IF the payment is genuinely for redundancy.
Compensation for loss of office - e.g. a settlement agreement to leave.
Ex-gratia payments - unsolicited goodwill payments at termination.

It does not include:

Salary up to your last day - taxed normally as PAYE.
Unused holiday pay - taxed normally as PAYE.
Payment in lieu of notice (PILON) - taxed normally as PAYE since April 2018, regardless of whether your contract has a PILON clause.
Contractual bonuses owed - taxed normally.
Pension contributions - outside this regime entirely.

The £30,000 cap is a lifetime cap per employer relationship - it doesn't reset with each year, but it does reset if you move to a different employer.

Statutory redundancy pay - the legal minimum

If you've been employed for at least two continuous years and you're under 65 (or your contractual retirement age), your employer must pay statutory redundancy. The formula:

Age at redundancy	Weeks per year of service
Under 22	0.5 weeks
22 to 40	1.0 week
41 and over	1.5 weeks

Subject to:

A maximum of 20 years of service counted.
A weekly pay cap of £700 (2026/27, reviewed annually in April).

So the absolute maximum statutory redundancy is 20 years × 1.5 weeks × £700 = £21,000.

Worked example: Sam is 45, has worked for the same employer for 15 years, weekly gross pay £900. Statutory calculation:

Age 22-40: 4 years (the years they were 41+ above) × 1.0 = 4 weeks
Age 41+: 11 years × 1.5 = 16.5 weeks (capped at 20 years total but Sam has 15)
Total: 20.5 weeks × £700 (capped) = £14,350

Sam's statutory redundancy is £14,350. If their employer offers no enhanced amount, this is what gets paid as the tax-free element.

Common confusion #1 - PILON

Payment in lieu of notice (PILON) is what your employer pays you for the notice period they don't make you work. Before April 2018, contractual PILONs were taxed differently from non-contractual ones. Now (under the Post-Employment Notice Pay rules, ITEPA 2003 s402D), all PILONs are taxed as ordinary earnings - PAYE income tax + Class 1 NIC.

If your offer letter says "£30,000 redundancy + £8,000 PILON", only the £30,000 element gets the tax-free treatment. The £8,000 PILON is fully taxed.

Common confusion #2 - holiday pay

Unused holiday days at your final pay are paid out as a cash equivalent. This is taxed normally - PAYE + NIC. Not part of the £30,000 tax-free allowance.

Common confusion #3 - enhanced redundancy

Many employers pay above statutory. Common patterns:

2 × statutory
4 weeks per year of service (capped at 26 weeks)
A lump sum based on length of service

If the enhancement is genuinely for the redundancy (not a disguised bonus or contractual entitlement), it qualifies for the £30,000 tax-free treatment up to the cap.

If it's a contractual bonus paid because of the redundancy timing, it's taxed normally.

What you'll see on your final payslip

A typical final payslip after a redundancy looks like:

Basic salary to last day:          £2,400.00   (taxed PAYE + NIC)
PILON (notice period):             £8,000.00   (taxed PAYE + NIC)
Holiday pay (unused days):         £1,200.00   (taxed PAYE + NIC)
Statutory redundancy:             £14,350.00   (tax-free up to £30k cap)
Enhanced redundancy (employer):   £20,000.00   (tax-free until £30k cap reached;
                                                balance £15,550 taxed PAYE)
TOTAL GROSS:                      £45,950.00
TAX-FREE PORTION (under £30k):    £30,000.00   (statutory + first £15,650 of enhanced)
TAXABLE PORTION:                  £15,950.00   (PILON + holiday + £15,550 enhanced − wait, see below)

Actually let me redo that - clearer:

Salary, PILON, holiday pay = £11,600 fully taxable as ordinary earnings.
Statutory redundancy + enhanced redundancy = £34,350 in total. £30,000 of that is tax-free. The remaining £4,350 is taxed at your marginal income tax rate (no NIC on the redundancy element).

Class 1 NIC on the £30k+ excess

Since April 2020, employer Class 1A NIC has been due on any termination payment above £30,000. Employee Class 1 NIC is not due on the termination payment itself (only on PILON, holiday pay and salary).

Net effect: above the £30k cap, your employer pays an extra 15% (the 2026/27 employer NI rate) on the excess but you don't pay employee NI on it. You only pay PAYE.

Pension contributions - the tax-saving move

If your employer offers it, you can salary-sacrifice some or all of the redundancy payment into a pension. Pension contributions are made out of pre-tax income. So instead of receiving (say) £20,000 of redundancy taxed at 40%, you can divert it to your pension and avoid the tax entirely.

Caveats:

The Annual Allowance (currently £60,000) caps how much you can put into a pension tax-free in any one year. If you're already maxing out, you may have less headroom.
Pension contributions are long-term and inaccessible until age 55 (rising to 57 by 2028). If you need cash now, this isn't your route.
Consult an FCA-regulated pension adviser before any large pension transfer.

Where to escalate if you suspect an error

If your employer pays less than the statutory minimum, or applies tax to the £30k tax-free portion, raise it in writing with payroll first. If unresolved:

Acas on 0300 123 1100 for free, confidential employment advice.
HMRC on 0300 200 3300 for the tax treatment specifically.
An employment solicitor if the dispute is serious or part of a wider unfair-dismissal claim.

For redundancy where the employer becomes insolvent before paying you, the Redundancy Payments Service (RPS) under the National Insurance Fund pays out claims. Apply via gov.uk/claim-redundancy as soon as administrators are appointed.

Disclaimer

PayslipIQ provides automated educational guidance based on the figures you supply. It is not regulated tax, financial or legal advice. Redundancy cases often have complications (settlement agreements, restrictive covenants, share-options unwinding) that need a qualified accountant or solicitor. For payments above £30,000 or where a settlement agreement is involved, get advice before signing.