Is redundancy pay taxable? The £30,000 rule explained
The first £30,000 of genuine redundancy pay is usually tax-free and free of National Insurance. But not everything in a redundancy package counts, and the rest is taxed like normal pay.
The £30,000 tax-free allowance
Statutory redundancy pay and any enhanced, non-contractual redundancy payment are treated as termination payments. The first £30,000 in total is tax-free. Anything above that is subject to income tax at your normal rates, and employer (not employee) National Insurance.
What's taxed as normal pay
Some payments are taxed in full, even if they're part of your redundancy package: your salary up to your leaving date, holiday pay for untaken leave, bonuses and commission, and payment in lieu of notice (PILON). These can't use the £30,000 allowance and have income tax and National Insurance taken off as usual.
Why you might see too much tax taken
Your final payslip is often processed with your P45 already issued, or with a large one-off sum in a single month, which can push you into a higher rate. If you've overpaid, you can reclaim it from HMRC, or it will be adjusted when you start your next job.
Paying redundancy money into your pension
If your redundancy pay is over £30,000, you can ask your employer to pay the excess straight into your pension. This can avoid income tax altogether, as long as it's within your annual allowance. It's worth checking with your employer before your final pay run.