Is redundancy pay taxable?
Part of it usually is, and part of it may not be. HMRC does not tax a redundancy "package" as one lump. Statutory redundancy, enhanced redundancy and genuine compensation may qualify for the first£30,000 combined tax-free termination payment exemption. PILON, holiday pay, wages and bonus are always taxed as employment income.
The £30,000 exemption (qualifying termination payments)
The first £30,000 of qualifying termination payments in a tax year is normally free of income tax and employee National Insurance. Amounts above £30,000 are taxed at your marginal rate. There is no employee NI on the excess qualifying amount.
Qualifying payments typically include statutory redundancy, contractual/enhanced redundancy, and genuine ex-gratia compensation for loss of employment. The label on your letter matters less than what the payment actually is.
Always taxable (employment earnings)
| Payment | Why it is taxed |
|---|---|
| PILON (payment in lieu of notice) | Pay you would have earned during notice — always earnings since April 2018 |
| Accrued holiday pay | Deferred wages |
| Unpaid salary / wages | Employment income |
| Bonus / commission | Employment income |
What does not automatically qualify
- Payments for restrictive covenants or confidentiality (different rules)
- Payments labelled "compensation" that are actually notice pay (PENP rules)
- Company car, share options, or benefits in kind (separate treatment)
If you did not work your full notice, HMRC's Post-Employment Notice Pay (PENP) rules can reclassify part of a severance payment as taxable earnings even when your contract calls it compensation.
Worked example
Gross package: £10,000 statutory + £12,000 enhanced + £6,000 PILON + £1,500 holiday = £29,500.
Qualifying termination: £22,000 — all within £30,000, so no tax or employee NI on that portion.
Taxable earnings: £7,500 — PAYE and NI apply in full.
Estimated take-home: £22,000 + net of £7,500 — not £29,500.
If qualifying payments totalled £35,000 instead, £5,000 would be taxed at marginal rate (no employee NI on that excess).
What this means for you
- Ask for a payment breakdown before you sign — totals hide tax differences.
- Enter PILON and holiday separately in a calculator; do not subtract £30,000 from the headline figure.
- Check your payslip when paid — payroll treatment should match HMRC categories.
- Scottish taxpayers pay Scottish income tax rates on taxable portions.
Caveats
This is general information based on GOV.UK and HMRC guidance. Contract terms, payroll systems, and individual circumstances vary. Not tax or legal advice.
Related guides
- How much will I actually take home?
- Is PILON taxable?
- Settlement agreement tax
- Redundancy and Universal Credit
Model your package with the Redundancy Take Home calculator
Source: GOV.UK — termination payments and tax. Last reviewed September 2026.