Few things create more financial uncertainty than redundancy. One letter, one meeting, and suddenly you’re asking a question that matters more than almost anything else right now: is redundancy pay tax-free, or is HMRC about to take a chunk of it?
The short truth is reassuring but nuanced. In the UK, some redundancy pay is tax-free, but not all of it — and misunderstanding the difference can cost you thousands. Many people assume the entire payout is protected. Others panic and expect taxes on everything. Both are wrong.
This guide breaks it down without legal jargon, scare tactics, or vague government wording. You’ll learn exactly how much redundancy pay is tax-free, which payments are always taxable, how NHS and voluntary redundancy work, and what actually happens if your payout goes over £30,000.
More importantly, you’ll see real examples, common mistakes, and a simple framework you can apply to your own redundancy package — whether it’s £8,000 or £80,000.
Everything here reflects UK rules as of 2026, aligned with HMRC, ACAS, and MoneyHelper guidance.
Let’s make sure you know what you keep — and what you don’t.
Is Redundancy Pay Tax Free in the UK?
Yes — redundancy pay is tax-free up to £30,000 in the UK.
This applies to:
- Statutory redundancy pay
- Non-contractual (ex gratia) redundancy payments
- Compensation is paid specifically because your role ends
Anything above £30,000 is subject to income tax, but not National Insurance, in most cases.
However — and this is where people get caught out — not everything in a redundancy package counts as redundancy pay.
The £30,000 Tax-Free Rule (What It Really Means)
What Counts Toward the £30,000 Allowance
- Statutory redundancy payment
- Enhanced redundancy (if genuine compensation)
- Voluntary redundancy payments
- Severance paid because your job ends
What Does NOT Count (Always Taxable)
- Pay in lieu of notice (PILON)
- Salary during notice period
- Holiday pay
- Bonuses or commission
- Benefits in kind
- Payments you were contractually entitled to anyway
HMRC taxes those as normal earnings, regardless of redundancy.
Also Read: List of Tax Codes and What They Mean HMRC: Complete Guide 20256
A Simple 4-Part Framework to Check Your Redundancy Tax
Step 1: Separate the Payments
Break your payout into:
- Redundancy compensation
- Notice-related pay
- Accrued earnings (holiday, bonus)
- Extras (benefits, goodwill payments)
Step 2: Apply the £30,000 Allowance
Only category #1 qualifies.
Step 3: Check the Excess
Any redundancy compensation over £30,000 → income tax only.
Step 4: Ignore NI on Redundancy
True redundancy pay is not subject to National Insurance.
This framework alone eliminates 90% of confusion.
How Much Redundancy Pay Is Tax Free? (With Examples)
1: £18,000 Redundancy Package
- Redundancy compensation: £18,000
✅ Entire amount is tax free
2: £45,000 Redundancy Package
- Redundancy compensation: £45,000
- Tax-free: £30,000
- Taxable: £15,000 (income tax only)
3: Mixed Payment Trap
- Redundancy compensation: £28,000
- PILON: £6,000
- Holiday pay: £2,000
Only £28,000 is tax free.
The £8,000 is taxed as salary.
Is NHS Redundancy Pay Tax Free?
Yes — NHS redundancy pay follows the same £30,000 rule.
Statutory and non-contractual NHS redundancy payments are tax free up to £30,000. However:
- NHS contractual notice pay is taxable
- Pension-related payments may have separate rules
- Early retirement packages are not redundancy pay
Always check whether a payment is labelled “compensation for loss of employment” — wording matters.
Voluntary Redundancy — Is It Treated Differently?
No. Voluntary redundancy pay is taxed the same as compulsory redundancy.
If it’s genuine compensation:
- First £30,000 → tax free
- Above that → income tax only
The word “voluntary” doesn’t change HMRC treatment.
Common Redundancy Tax Mistakes That Cost People Money
- Assuming PILON is tax free
- Thinking the £30,000 resets per employer
- Not checking the payslip breakdown
- Believing “HMRC will sort it later.”
- Confusing settlement agreements with redundancy pay
One wrong assumption can mean an unexpected bill months later.
Also Check: Deadline for Income Tax Return 2025–2026: UK Filing Guide
Redundancy Pay Cheat Sheet (Save This)
| Payment Type | Taxed? | NI? |
|---|---|---|
| Statutory redundancy | ❌ | ❌ |
| Enhanced redundancy | ❌ (≤£30k) | ❌ |
| Redundancy over £30k | ✅ | ❌ |
| PILON | ✅ | ✅ |
| Holiday pay | ✅ | ✅ |
| Bonus | ✅ | ✅ |
2026 Update — What Hasn’t Changed (And Why That Matters)
Despite inflation, the £30,000 threshold has not increased in 2026. That means more people are crossing it, and more redundancy pay is becoming taxable.
There’s ongoing discussion about reform, but no confirmed changes as of 2026.
Plan based on current rules, not speculation.
FAQs
Q. How much of my redundancy pay is tax free in the UK?
In the UK, up to £30,000 of genuine redundancy pay is tax free. This includes statutory redundancy pay and non-contractual compensation paid because your job ends. Amounts within this limit are not subject to income tax or National Insurance.
Q. Do I pay tax on redundancy pay over £30,000?
Yes. Any redundancy pay above £30,000 is subject to income tax, based on your tax band. However, it is not subject to National Insurance contributions when it qualifies as genuine redundancy compensation.
Q. Is all redundancy pay tax free?
No. Not all redundancy pay is tax free. Only genuine redundancy compensation qualifies for the £30,000 tax-free exemption. Payments such as pay in lieu of notice (PILON), holiday pay, bonuses, and unpaid salary are always taxed as normal earnings.
Q. Is NHS redundancy pay tax free?
Yes. NHS redundancy pay is tax free up to £30,000, provided it is paid as genuine compensation for loss of employment. Contractual payments, notice pay, and pension-related payments are taxed separately under standard income tax rules.
Q. What is the 70/30 rule in redundancy?
There is no official 70/30 rule for redundancy pay in the UK. This is a common myth. It is often confused with the £30,000 tax-free redundancy allowance, which is the only legally recognised threshold used by HMRC.
Q. Is voluntary redundancy pay taxable?
Voluntary redundancy pay is treated the same as compulsory redundancy pay. Up to £30,000 is tax free if it is genuine redundancy compensation. Any amount above £30,000 is subject to income tax but not National Insurance.
Q. Does redundancy pay affect my tax band?
Yes. Taxable redundancy pay can push you into a higher income tax band for that tax year. This usually applies only to the portion above £30,000 or to taxable elements like PILON or bonuses.
Q. Do I pay National Insurance on redundancy pay?
No. Genuine redundancy pay is not subject to National Insurance, even if it exceeds £30,000. However, NI does apply to taxable earnings such as notice pay and holiday pay.
Conclusion
Redundancy pay can be tax free, but only the right kind of payment — and only up to £30,000. The key is understanding what counts as genuine redundancy compensation versus normal earnings.
Once you separate the components, the rules are surprisingly consistent. Statutory, voluntary, and NHS redundancy all follow the same framework, while notice pay and holiday pay are always taxable.
If you’re unsure, check your breakdown carefully and don’t rely on the headline payout figure alone. Knowing how redundancy pay is taxed in the UK lets you plan properly, avoid surprises, and move forward with clarity.
Related: UK Tax Return Deadlines 2026: Key Dates for 2024/25 & 2025/26
