Redundancy Pay Tax 2026/27 — What's Taxable and What's Not

When you are made redundant, the tax treatment depends on what kind of payment you receive, not just how much. The first combined £30,000 of qualifying redundancy or termination awards is usually free of Income Tax, while Pay in Lieu of Notice, Post-Employment Notice Pay and outstanding holiday pay are taxable as earnings. Employer Class 1A National Insurance can apply to qualifying awards above £30,000. Work out your own figures with the Redundancy Calculator→.

This guide explains the £30,000 threshold, how PILON and post-employment notice pay work, what is exempt, and how to structure a package to minimise tax.

What's Taxable and What's Not

The £30,000 exemption is a combined limit for qualifying termination awards connected with the employment, not a fresh allowance for every payment or tax year. Statutory redundancy pay and qualifying enhanced or ex-gratia payments share the limit. The detailed treatment of separate employments and payments depends on the facts, so do not assume two employers automatically create two full allowances.

Pay in Lieu of Notice (PILON)

PILON is payment your employer makes instead of requiring you to work your notice. PILON and the amount identified as Post-Employment Notice Pay (PENP) are taxable as earnings whether or not the contract contains a PILON clause. On a £5,000 monthly salary with three months' notice, a £15,000 PILON at 40% Income Tax and a simplified 2% employee NI assumption would leave about £8,700 before other payroll effects; actual payroll depends on thresholds, tax code and cumulative income.

Post-Employment Notice Pay (PENP)

Since 2018 the Post-Employment Notice Pay rules prevent notice pay being treated as a tax-free termination payment. Where relevant, a PENP amount is identified and taxed as earnings:

PENP = (Basic pay ÷ days in pay period) × (unworked days of notice − days already paid)

The PENP figure is not covered by the £30,000 exemption, so high-value packages must be computed carefully. The exact calculation depends on the payment period, notice dates, basic pay and amounts already paid.

Worked Example — £50,000 Package

Tom receives statutory redundancy of £600, an ex-gratia payment of £49,400 and no PILON. The first £30,000 of the ex-gratia is tax-free, leaving £19,400 taxable at his marginal rate of 20% — £3,880 of tax. His net package is £46,120.

Worked Example — £30,000 with PILON

Sara receives £12,000 of PILON (three months) and £18,000 ex-gratia. The PILON is fully taxable — £2,400 at 20% plus NI — while the £18,000 ex-gratia is tax-free within the £30,000 exemption. Her net is roughly £27,600 from a £30,000 headline figure, which shows why the PILON split matters.

Reporting and Minimising Tax

Your employer normally reports taxable elements through payroll and gives you a P45. Benefits in kind have their own reporting treatment. A termination payment does not automatically require a Self Assessment return; other income, a tax shortfall or a repayment claim can change that. Obtain a component-by-component breakdown, check the PENP calculation, and take advice before changing the payment date or substituting pension contributions. Employer-paid legal fees can be exempt when the statutory conditions are met.

Benefits, Gifts and Other Settlement Elements

A termination package can include far more than cash, and every non-cash element needs separate treatment. If your employer lets you keep the company car, the continuing benefit may be taxed as a benefit in kind. Extended private medical cover is generally taxable. Legal fees and outplacement support can be exempt only where the relevant conditions are satisfied. A written-off employer loan and shares or assets transferred as part of the settlement need their own valuation and tax analysis.

The valuation of non-cash elements matters because the £30,000 exemption is consumed by the total termination package, not just the cash. A package of £20,000 cash plus a £15,000 benefit-in-kind value leaves only £10,000 of headroom in the exemption, with the excess taxed at your marginal rate. Before signing, ask for a written schedule showing every element, its taxable value and how the £30,000 is allocated — and take independent advice on any package that includes shares, loans or property, where the valuation rules are materially more complex than cash.

Timing Your Redundancy Across Tax Years

The timing of a redundancy inside the tax year matters because taxable elements like PILON are added to your income. Made redundant in May, most of your annual Personal Allowance and basic-rate band are still unused, so a £20,000 PILON can be taxed at 20% instead of 40%. Made redundant in February with a £60,000 salary already behind you, the same PILON sits in the higher band. A payment date can affect marginal tax rates, but changing the date does not create a new termination-award exemption and anti-avoidance and contractual rules may apply.

If you move straight into a new job, the picture reverses: the new salary plus the taxable termination element may push you into a higher band in the same year, so model the combined income before agreeing to a quick start. Pension contributions may be tax-efficient, but annual-allowance, contribution and scheme rules apply; they do not automatically turn taxable PILON into exempt redundancy pay.

Frequently Asked Questions

Evidence and decision checks

A reliable redundancy tax 2026 27 review starts by fixing the tax year and the date on which the relevant event happened. Record the person's or business's status, the income or transaction category, the amount before tax, tax already withheld, and any election or claim being relied on. Do not combine a headline figure with a final liability: the result can change when another income source, a payment date, an ownership interest or a qualifying condition is added.

Keep the source documents behind every important input. Depending on the subject, that may include payslips, invoices, bank statements, contracts, provider statements, travel records, HMRC notices, payroll submissions, valuations or correspondence. Where an amount is apportioned, write down the method and retain the underlying total. If a correction is made, preserve the original figure and explain the reason, date and evidence for the replacement.

Before relying on the result, check the current official guidance for the same tax year and jurisdiction. Distinguish enacted law from a consultation, draft measure, announcement or future proposal, and record the effective date. Reconcile the final estimate to the relevant return, payroll record or HMRC account. A calculator or explanatory guide can support a decision, but it cannot replace the eligibility test or the official filing and payment process.

Evidence and decision checks

A reliable redundancy tax 2026 27 review starts by fixing the tax year and the date on which the relevant event happened. Record the person's or business's status, the income or transaction category, the amount before tax, tax already withheld, and any election or claim being relied on. Do not combine a headline figure with a final liability: the result can change when another income source, a payment date, an ownership interest or a qualifying condition is added.

Keep the source documents behind every important input. Depending on the subject, that may include payslips, invoices, bank statements, contracts, provider statements, travel records, HMRC notices, payroll submissions, valuations or correspondence. Where an amount is apportioned, write down the method and retain the underlying total. If a correction is made, preserve the original figure and explain the reason, date and evidence for the replacement.

Before relying on the result, check the current official guidance for the same tax year and jurisdiction. Distinguish enacted law from a consultation, draft measure, announcement or future proposal, and record the effective date. Reconcile the final estimate to the relevant return, payroll record or HMRC account. A calculator or explanatory guide can support a decision, but it cannot replace the eligibility test or the official filing and payment process.

Separating termination payments

Create a schedule for salary to leaving date, notice pay, holiday pay, statutory redundancy, enhanced redundancy, bonuses, shares, restrictive-covenant payments and compensation. Each component can have a different Income Tax and National Insurance treatment. Keep the employer's calculation, contract, settlement agreement, payroll record and payment date together.

Check whether notice pay is treated under the post-employment notice rules, whether a tax-free termination amount is available, and whether earlier payments have already used part of a threshold. Do not describe the whole package as “redundancy pay” without testing each component. A payment may also affect pension contributions, benefits and a later tax return.

Reconcile the final payslip and P45 to the settlement schedule. If the employer's tax treatment appears wrong, ask for the statutory basis and correct the record promptly rather than relying on a headline calculator result.

See the full picture with the Redundancy Calculator→, read the Redundancy Pay Calculator guide→ to understand the statutory formula, and check the Termination Payments guide before signing any settlement.

Official sources

• GOV.UK: redundancy pay — tax and National Insurance
• GOV.UK: termination payments and tax
• GOV.UK: redundancy pay
• GOV.UK: employer rates and thresholds for 2026 to 2027
• HMRC: Class 1A National Insurance on termination payments

These GOV.UK and HMRC sources are the official references for the £30,000 exemption, taxable notice pay, PENP, National Insurance and redundancy-payment treatment discussed here.