The £30,000 tax-free rule
The cornerstone of UK redundancy tax: the first £30,000 of statutory + enhanced redundancy is tax-free and free of National Insurance. This threshold has been at £30,000 since 1988 and has not been uprated for inflation — fiscal drag means more redundancies cross the threshold every year.
What sits inside the £30,000:
- Statutory redundancy pay (per HMRC formula)
- Enhanced (contractual) redundancy pay
- Genuine ex gratia payments that aren't disguised salary
- Compensation for loss of office (in true redundancy)
What sits OUTSIDE the £30,000:
- Salary up to your termination date
- PILON / Post-Employment Notice Pay (PENP)
- Garden leave salary
- Holiday pay (accrued unused leave)
- Contractual bonus (pro-rata or otherwise)
- Long-term incentive plan vesting
- Restrictive covenant payments (in some cases)
The breakdown of your termination payment matters enormously. A poorly-described "lump sum redundancy" can result in HMRC treating less of it as inside the £30,000 threshold than expected.
Above £30,000: taxed at marginal rate
The excess above £30,000 is taxed at your marginal Income Tax rate but does NOT attract National Insurance. This is the second meaningful tax advantage of redundancy compared to ordinary salary.
For a higher-rate earner: - Above-threshold redundancy: taxed at 40%, no NI - Ordinary salary or PILON: taxed at 40% + 2% NI = 42%
For an additional-rate earner: - Above-threshold redundancy: 45%, no NI - Ordinary salary or PILON: 45% + 2% = 47%
The 2% NI saving on the above-threshold portion isn't life-changing but isn't trivial — on a £50,000 above-threshold amount, the NI saving is £1,000.
Worked example 1 — £25,000 redundancy package
- Statutory redundancy: £8,000
- Enhanced redundancy: £10,000
- Total inside the £30k threshold: £18,000 (well under)
- PILON (8 weeks @ £50k salary): £7,692
- Holiday pay accrued: £2,884
- Bonus pro-rata: £1,500
Tax: - Redundancy £18,000: tax-free, no NI = £18,000 net - PILON £7,692: taxed as salary; assume basic + slight higher = ~£2,300 tax + NI = £5,392 net - Holiday £2,884: similar treatment = £2,078 net - Bonus £1,500: similar = £1,080 net
Gross total: £30,076 → Net total: ~£26,550
Worked example 2 — £75,000 redundancy package
- Statutory: £8,000
- Enhanced: £50,000
- Total inside the £30k threshold: £58,000
- PILON (12 weeks @ £80k salary): £18,462
- Holiday pay: £4,615
Tax: - First £30,000 of redundancy: tax-free = £30,000 net - £28,000 above threshold: assume higher-rate earner → 40% tax = £11,200 → £16,800 net - PILON £18,462: at higher rate + 2% NI = ~£7,754 deducted = £10,708 net - Holiday £4,615: at higher rate + 2% NI = ~£1,938 deducted = £2,677 net
Gross total: £100,077 → Net total: ~£60,185
The tax bill is £39,892 on £100k of termination payments. Substantial.
Worked example 3 — £150,000 redundancy with tax-band shifting
A senior employee on £120,000 salary receives £150,000 redundancy in October:
- £30,000 tax-free
- £120,000 above threshold
In-year earnings to date by October: £70,000 (7/12ths of £120k). Plus £150k = £220k total income for the year.
This pushes the employee through: - The personal allowance taper (£100,000–£125,140) — losing £12,570 of allowance, effectively taxed at 62% - Well into the additional rate (45% above £125,140)
The tax on the £120,000 above-threshold redundancy: - Approx £15,000 sits in the 40% band - Approx £25,140 sits in the personal-allowance-taper band (effective 60%) - Approx £80,000 sits in the 45% additional rate band
Total tax on above-threshold redundancy: roughly £60,000–£65,000.
This is why high-value redundancies sometimes benefit from negotiating the payment date into early April — splitting income across tax years can reduce total tax materially.
Tax-year planning
The tax year runs 6 April to 5 April. A redundancy paid:
- Late in the tax year (Feb–April): added to a full year's salary, often pushing into high tax bands
- Early in the tax year (April–May): the employer has only paid a few weeks of salary so far, so there's more headroom in lower tax bands
- Split across tax years (settlement agreement structuring): some terminations pay statutory in the old year and PILON in the new year, optimising both
A senior employee taking redundancy in March can often negotiate to defer the actual payment into April for a meaningfully better tax outcome. This requires the employer's agreement; most are willing if the deal is otherwise final.
Pension sacrifice — the largest tax-mitigation lever
The single most valuable move you can make on a large redundancy:
Sacrifice part of the redundancy into your pension via salary sacrifice in the final month of employment.
- Sacrificed amount is treated as employer pension contribution
- No Income Tax or NI applies (both employee and employer)
- For a higher-rate earner, every £1,000 sacrificed costs £580 of net redundancy and saves £420 of tax + NI
This requires: - Employer agreement (must be in place before termination) - A workplace pension that accepts large lump-sum salary sacrifice - Practical timing — the sacrifice must occur before the redundancy is paid
For a £100,000 above-threshold redundancy, sacrificing £40,000 to pension could save £16,800 in tax + NI. Even after accounting for the locked-up nature of pension money, this is usually the best move for senior employees with sufficient pension annual allowance headroom.
Watch out for the pension annual allowance (£60,000) and tapered annual allowance (relevant above £260,000 total income). A very large sacrifice into pension can hit these limits and create unexpected tax charges.
When you may need Self Assessment
PAYE often gets redundancy tax wrong because the calculation happens once per year. After a large redundancy you may need to file Self Assessment to:
- Reconcile in-year overpayment (most common — you get a refund)
- Settle in-year underpayment (less common — happens with very complex packages)
- Report income above £150,000 in the year (now triggered by many redundancies)
- Apply the personal allowance taper correctly (above £100,000)
- Claim higher-rate pension relief if you made personal contributions
Self Assessment is filed by 31 January after the tax year ends. Don't assume PAYE will get this right — it usually doesn't on large terminations.
Common mistakes
- Treating the whole package as "redundancy" — only statutory + enhanced is inside the £30k. Notice pay, holiday, bonus are taxed in full.
- Forgetting NI savings on above-threshold redundancy — many calculators apply NI; redundancy doesn't have it.
- Missing the pension sacrifice window — once termination has happened, this option is gone.
- Accepting a settlement agreement with ambiguous breakdown — settlement agreements should specify the tax treatment of each component.
- Not filing Self Assessment when triggered — the obligation falls on you, not the employer.
Practical checklist
- Get a line-item breakdown. Demand: statutory, enhanced, PILON, holiday, bonus, ex gratia.
- Verify the £30k threshold split. Only statutory + enhanced should be allocated to it.
- Model the tax with the take-home calculator to estimate your net.
- Consider pension sacrifice if the above-threshold amount is sizeable.
- Plan tax-year timing if the redundancy is large enough to push you into higher bands.
- Check Self Assessment obligation for the year of redundancy.
In short
The first £30,000 of statutory + enhanced redundancy is tax-free and free of National Insurance. Above that, marginal rate income tax applies but NI doesn't. PILON, notice pay, garden leave, holiday and bonus are all fully taxable salary, regardless of how the offer letter describes them. For large packages, pension salary sacrifice before termination is the highest-leverage move. For the broader context, see the redundancy hub.