Do I Still Pay Tax on Redundancy Payments Over £30,000

Introduction

Redundancy pay is designed to support employees who lose their jobs through no fault of their own. While the first portion of redundancy pay is usually tax-free, higher amounts are subject to tax and National Insurance rules.

Understanding how tax applies to redundancy payments can help you plan your finances and avoid unexpected deductions.

How redundancy pay works

Redundancy payments fall into two main categories:

Statutory redundancy pay: The minimum payment employers must provide to eligible employees under UK law.

Contractual or enhanced redundancy pay: Any additional amount agreed in your contract or as part of your employer’s redundancy policy.

Statutory redundancy pay is always free from tax and National Insurance. Enhanced payments can also be partly tax-free, depending on the total amount you receive.

The £30,000 tax-free limit

Under UK tax rules, the first £30,000 of any redundancy payment is tax-free. This exemption applies to both statutory and enhanced redundancy pay combined.

Any amount you receive above £30,000 is treated as taxable income. Your employer must deduct Income Tax through PAYE on the excess portion.

For example:

Redundancy payment: £45,000

Tax-free amount: £30,000

Taxable amount: £15,000

You would pay Income Tax on the £15,000, based on your tax code and the rate that applies to your total income for the year.

What counts toward the £30,000 limit

The tax-free threshold covers payments that are genuinely related to redundancy, such as:

Statutory redundancy pay.

Non-contractual redundancy or severance payments.

Compensation for loss of employment (for example, where your role is no longer required).

However, not all payments you receive on termination of employment count as part of the £30,000 exemption.

Payments that are taxable in full

Certain payments made when you leave a job are considered part of your normal earnings and are fully taxable, regardless of redundancy. These include:

Pay in lieu of notice (PILON): If your employer pays you instead of requiring you to work your notice period.

Holiday pay: Payment for unused annual leave.

Bonuses and commission: Any outstanding performance-related payments.

Wages: Your final salary up to the last working day.

These amounts are treated as regular income and taxed in full through payroll, with both Income Tax and National Insurance deducted.

How tax is deducted from redundancy pay

Employers are responsible for calculating and deducting any tax owed on redundancy payments over £30,000. The taxable portion is processed through the payroll system, and tax is deducted via PAYE.

National Insurance contributions are not payable on redundancy pay, even for amounts exceeding £30,000. However, you may pay NI on other elements of your final pay, such as PILON or bonuses.

If your redundancy payment pushes you into a higher tax band for that month, you might pay more tax than necessary initially. HMRC will usually adjust this through your tax code or when you complete your Self Assessment return.

Example of tax on redundancy pay

Let’s say:

You receive £40,000 redundancy pay.

£30,000 is tax-free.

£10,000 is taxable.

If your total income for the year puts you in the basic rate band, you would pay 20 percent tax on £10,000, meaning £2,000 is deducted through PAYE.

If your redundancy occurs late in the tax year and your income falls, you might be due a tax refund when HMRC reviews your overall income.

When redundancy payments are not tax-free

The £30,000 exemption only applies to genuine redundancy situations. Payments may be taxable from the first pound if:

You resign voluntarily.

You are dismissed for misconduct.

The payment is part of a contractual entitlement rather than a redundancy arrangement.

If your employer labels a payment as “redundancy pay” but it does not meet HMRC’s criteria, tax will still apply.

How to check your redundancy payment

When you are made redundant, your employer must give you a written statement showing:

How your redundancy pay has been calculated.

Which parts are tax-free and which are taxable.

Deductions made for Income Tax and National Insurance.

Check these details carefully. If you think too much tax has been deducted, you can contact HMRC to request a review.

Receiving redundancy pay in instalments

If your employer pays redundancy money in instalments rather than a lump sum, the £30,000 tax-free allowance applies to the total amount across all payments. Once your cumulative payments exceed £30,000, tax applies to any further instalments.

Lump-sum payments and pensions

If you receive a redundancy payment at the same time as a pension lump sum, these are treated separately for tax purposes. The £30,000 exemption only applies to redundancy pay, not to pension withdrawals, which are taxed under pension rules.

Claiming a tax refund after redundancy

If you stop working and have no further income that tax year, you may be eligible for a tax refund. To claim, you can:

Complete form P50 on GOV.UK if you are not claiming benefits or a pension.

Wait for HMRC to automatically review your tax position at the end of the tax year.

HMRC will issue a refund if you have overpaid due to your redundancy payment being taxed on an emergency basis.

Common mistakes to avoid

Assuming the entire redundancy payment is tax-free.

Confusing pay in lieu of notice or holiday pay with redundancy pay.

Forgetting that redundancy payments can affect benefits or tax credits.

Failing to check your final payslip or P45 for accuracy.

Avoiding these mistakes helps you understand exactly how much you are entitled to and ensures you pay the correct amount of tax.

Conclusion

The first £30,000 of a genuine redundancy payment is tax-free, but any amount above that is subject to Income Tax. Payments such as notice pay, holiday pay, and bonuses are always taxable in full.

If you are unsure about how your redundancy package has been taxed, ask your employer for a breakdown or contact HMRC for clarification. Knowing how the rules work will help you manage your finances and avoid surprises during what can already be a stressful time.