How Much Redundancy Tax Free?

Index:

• Understanding the Tax-Free Redundancy Limit in the UK

• Navigating Tax Complications and Refunds on Redundancy Pay

• Rare Scenarios and Long-Term Planning with Redundancy Pay

• Summary

• FAQs

The Audio Summary of the Key Points of the Article:

UK Redundancy Payments Explained

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Understanding the Tax-Free Redundancy Limit in the UK

Right, let’s get straight to the point: if you’re wondering how much of your redundancy payment in the UK is tax-free, the answer is £30,000. This figure applies to the 2025/2026 tax year, and it’s been a cornerstone of UK tax law for years, covering both statutory and non-statutory redundancy payments. But, as with anything tax-related, there’s more to it than meets the eye. Whether you’re an employee facing redundancy or a business owner sorting out severance packages, understanding the ins and outs of this limit can save you a headache—and potentially a hefty tax bill. Let’s break it down with some solid facts, practical tips, and a few real-world examples to make sense of it all.

What Counts as a Redundancy Payment?

Now, when we talk about redundancy payments, we’re referring to money you get when your job is cut—think statutory redundancy pay (the legal minimum you’re entitled to after two years of service) or extra payments your employer might throw in, often called ex-gratia or non-statutory payments. The first £30,000 of these combined is free from both Income Tax and National Insurance Contributions (NICs), as per HMRC rules. But here’s the catch: not everything you receive when you leave a job qualifies for this tax-free perk.

What qualifies as a tax-free redundancy payment

For example, payments like holiday pay, bonuses, or wages owed are treated as regular income and taxed as such. Payments in lieu of notice (PILON)—money you get if your employer lets you go without working your notice period—are also fully taxable and don’t count toward the £30,000 limit. This distinction is critical, so always check what’s in your redundancy package. A mate of mine, let’s call her Siobhan from Bristol, got a £40,000 payout last year but was gutted to learn only £25,000 was tax-free because £15,000 was PILON and holiday pay.

Statutory Redundancy Pay: The Basics

So, what’s statutory redundancy pay? If you’ve worked for your employer for at least two years, you’re entitled to this by law. The amount depends on your age, length of service (capped at 20 years), and weekly pay (capped at £719 for the 2025/2026 tax year). Here’s how it’s calculated:

• Half a week’s pay for each full year you worked under age 22.

• One week’s pay for each full year between ages 22 and 40.

• One and a half weeks’ pay for each full year aged 41 or older.

The maximum statutory payout is £21,570 (30 weeks at £719), and since this is always below £30,000, it’s tax-free. Let’s say you’re 45, with 10 years of service, earning £800 a week. Your statutory pay would be 10 years x 1.5 weeks x £719 (not £800, due to the cap) = £10,785—completely tax-free.

Age Band	Weeks’ Pay per Year	Weekly Pay Cap (2025/2026)	Max Statutory Pay
Under 22	0.5	£719	£21,570 (total cap)
22–40	1.0	£719	£21,570 (total cap)
41+	1.5	£719	£21,570 (total cap)

Source: GOV.UK Redundancy Pay Calculator

Non-Cash Benefits and the £30,000 Limit

Be careful! If your redundancy package includes non-cash benefits—like keeping the company car or laptop—these are assigned a cash value by HMRC and added to your redundancy payment. For instance, Dilip, a marketing manager in Manchester, got a £28,000 redundancy payment and a company car valued at £5,000. The total (£33,000) pushed him over the £30,000 limit, so he paid tax on the £3,000 excess. Always ask your employer for a breakdown to avoid surprises.

Why the £30,000 Limit Matters

Now, why should you care about this £30,000 figure? For employees, it’s a financial cushion that doesn’t get eaten up by taxes—up to a point. For business owners, understanding this limit helps you structure redundancy packages that are tax-efficient for your staff, keeping them happy while staying compliant with HMRC. But there’s a twist: any amount over £30,000 is taxed as income, and employers often use a temporary tax code (like 0T Month 1) for these payments, which can lead to over- or under-taxation.

Tax Bands and Redundancy Pay

None of us loves crunching numbers, but knowing how your redundancy pay interacts with your tax bands is key. For 2025/2026, the UK Income Tax bands are:

• Personal Allowance: £12,570 (tax-free)

• Basic Rate: 20% on income from £12,571 to £50,270

• Higher Rate: 40% on income from £50,271 to £125,140

• Additional Rate: 45% on income above £125,140

If your redundancy payment pushes your total income (including other earnings) into a higher tax band, the portion above £30,000 could be taxed at 40% or even 45%. Take Fiona, a 50-year-old from Leeds, who earned £45,000 in 2024 before being made redundant with a £50,000 payout. The first £30,000 was tax-free, but the remaining £20,000 was taxed at 40% (her higher-rate band), costing her £8,000 in tax. Ouch.

HMRC Reporting Requirements

Now, here’s something business owners need to clock: if you’re paying out redundancy money, you must report any taxable portion (above £30,000) through PAYE, just like regular wages. You’ll also need to pay Class 1A National Insurance (15% for 2025/2026) on amounts exceeding £30,000. Employees, you’ll need to declare your redundancy pay on your Self Assessment tax return if it’s over £30,000 or if HMRC asks you to. Missing this could land you with a penalty, so keep records handy.

UK Redundancy Tax-Free Statistics (2020-2024)

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Navigating Tax Complications and Refunds on Redundancy Pay

So, you’ve got the basics of the £30,000 tax-free redundancy limit down, but what happens when things get messy? Over-taxation, under-taxation, delayed payments, or even disputes with your employer can turn a straightforward payout into a tax nightmare. This part is all about helping you dodge those pitfalls, whether you’re an employee trying to keep more of your redundancy cash or a business owner making sure your staff aren’t stung by HMRC. We’ll dig into practical steps, real-life scenarios, and some lesser-known quirks of the system, all backed by the latest 2025/2026 tax rules.

Emergency Tax Codes and Over-Taxation

Now, picture this: you’ve just received a £50,000 redundancy payout, and your payslip shows a massive chunk taken out for tax—way more than you expected. Sound familiar? This often happens because employers apply an emergency tax code (like 0T Month 1) to the taxable portion of your redundancy pay (anything over £30,000). These codes assume you’re earning that amount every month, which can push you into a higher tax bracket temporarily.

Take Ewan, a 38-year-old from Glasgow, who got a £45,000 redundancy payment in 2024. The first £30,000 was tax-free, but the remaining £15,000 was taxed at 40% under an emergency code, costing him £6,000 instead of the £3,000 he’d have paid at his usual 20% basic rate. The fix? Ewan contacted HMRC, who adjusted his tax code and refunded the overpayment within weeks. If this happens to you, check your payslip, grab your P45, and call HMRC or use the GOV.UK Income Tax Checker to sort it out.

How to Claim a Tax Refund

Right, if you’ve been over-taxed, don’t panic—it’s fixable. Here’s a step-by-step guide to reclaiming your money:

1. Check Your Payslip and P45: Look for the tax code used and the amount deducted. Compare it to your expected tax liability based on your annual income and the 2025/2026 tax bands (see Part 1).

2. Contact HMRC: Call 0300 200 3300 or use the online service at GOV.UK. Have your National Insurance number, P45, and payslip details ready.

3. Submit a Self Assessment: If your redundancy pay pushes you into Self Assessment (e.g., over £30,000 or mixed income sources), file a return by 31 January 2026 to correct your tax.

4. Expect a Refund: HMRC typically processes refunds within 6–8 weeks, either as a cheque or direct bank transfer.

In 2023, HMRC reported that over 1.2 million UK taxpayers reclaimed overpaid tax on redundancy payments, so you’re not alone. Keep records of all correspondence to avoid delays.

Step	Action	Timeline	Tools Needed
1. Check Documents	Review payslip/P45 for tax code	Immediate	Payslip, P45
2. Contact HMRC	Call or use online service	1–2 days	NI number, payslip
3. Self Assessment	File if required	By 31 Jan 2026	Tax return form
4. Receive Refund	Wait for HMRC processing	6–8 weeks	Bank details

Source: HMRC Tax Refunds Guidance

Tax Refund Claim Process

Under-Taxation: A Hidden Trap

Be careful! Sometimes, the opposite happens—your redundancy pay is under-taxed, leaving you with a bill later. This can occur if your employer uses your regular tax code or doesn’t account for other income you’ve earned in the tax year. For instance, Priya, a 42-year-old from Birmingham, received a £40,000 redundancy payout in 2024, with only £2,000 tax deducted from the £10,000 taxable portion. She assumed she was in the clear, but HMRC later billed her £2,000 because her total income (including freelance work) pushed her into the 40% tax band.

To avoid this, estimate your total income for the tax year, including redundancy pay, and use HMRC’s Tax Calculator to check your liability. If you suspect under-taxation, set aside money for a potential HMRC bill or contact them proactively to adjust your tax code.

Delayed Redundancy Payments

Now, what if your redundancy pay comes in dribs and drabs? Some employers spread payments over months or even years, especially for senior staff. This can affect your tax situation. Payments received in the 2025/2026 tax year count toward that year’s £30,000 tax-free limit, but if payments cross tax years, each year gets its own £30,000 allowance. Sounds great, right? Not so fast.

Consider Gareth, a director in Cardiff, who was promised a £60,000 redundancy package in 2024, paid as £30,000 in 2024/2025 and £30,000 in 2025/2026. Both payments were tax-free because they fell under the £30,000 limit for each tax year. But if the full £60,000 had come in one go, he’d have paid tax on £30,000. The lesson? Check the timing of your payments and discuss with your employer if spreading them out could save tax.

Business Owners: Structuring Tax-Efficient Packages

So, if you’re running a business, how do you make redundancy payments work for your employees and your bottom line? First, ensure payments are clearly labelled as redundancy (not PILON or bonuses) to maximise the tax-free portion. Second, avoid non-cash benefits unless employees specifically want them—they complicate things and can erode the £30,000 limit. Third, use HMRC’s Real Time Information (RTI) system to report taxable amounts accurately, avoiding penalties.

A case study from 2024: a small tech firm in London paid £35,000 to a redundant employee, structuring it as £30,000 redundancy pay (tax-free) and £5,000 as a taxable bonus. The employee paid £1,000 tax (20%) on the bonus, and the firm saved on NICs by keeping the redundancy portion tax-free. Smart planning makes a difference.

Pension Contributions and Redundancy Pay

Here’s a gem not everyone knows: you can use redundancy pay to boost your pension and save tax. If your employer agrees, they can pay part of your redundancy package (up to £30,000) directly into your pension scheme, bypassing Income Tax and NICs entirely. For example, in 2025, Aisha, a 55-year-old from Sheffield, directed £20,000 of her £25,000 redundancy pay into her pension. This not only secured her retirement but also avoided tax on the payment. Check with your employer and pension provider, as not all schemes allow this.

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Rare Scenarios and Long-Term Planning with Redundancy Pay

Now, you’re clued up on the £30,000 tax-free limit and how to dodge common tax traps, but what about the curveballs? Redundancy pay can throw up some unusual situations—like disputes with HMRC, payments tied to legal settlements, or using your payout to start a new chapter. This final part dives into these rare scenarios, offers practical advice for long-term financial planning, and ensures you’re ready for whatever comes next, whether you’re an employee or a business owner. Let’s wrap this up with actionable insights and some fresh perspectives, all grounded in the 2025/2026 tax rules.

Redundancy Pay in Legal Settlements

So, what happens if your redundancy comes with a legal twist? Sometimes, employees receive payments as part of a settlement agreement (think unfair dismissal or discrimination claims). These can include redundancy pay, but HMRC is picky about what qualifies for the £30,000 tax-free limit. Only amounts directly tied to the loss of employment—like statutory or ex-gratia redundancy payments—count. Compensation for injury to feelings or legal fees, for example, is often taxable.

Take the case of Niamh, a 35-year-old from Belfast, who received a £50,000 settlement in 2024 after a wrongful dismissal claim. Her agreement broke it down: £25,000 for redundancy (tax-free), £15,000 for loss of earnings (taxed at 20%), and £10,000 for emotional distress (also taxable). Niamh’s solicitor ensured the agreement clearly separated these amounts, saving her thousands in tax. If you’re in this boat, always get legal advice to structure the settlement tax-efficiently and double-check with HMRC’s Settlement Agreement Guidance.

Disputes with HMRC

Be careful! HMRC doesn’t always agree with how your employer classifies redundancy pay, and disputes can arise. For instance, if your employer labels a payment as redundancy but HMRC thinks it’s a bonus or PILON, you could face a tax bill years later. In 2023, a Sheffield-based retailer was audited, and HMRC reclassified £20,000 of an employee’s £40,000 “redundancy” payment as a performance bonus, hitting the employee with a £4,000 tax demand.

To protect yourself, keep detailed records: your redundancy agreement, payslips, P45, and any correspondence with your employer. If HMRC challenges you, request a formal review through their Dispute Resolution Service. Business owners, ensure your HR team documents every redundancy payment clearly to avoid audits. A quick tip: use HMRC’s Employer Compliance Helpline for clarity before making payments.

Redundancy Pay and Benefits

Now, here’s a question many overlook: does redundancy pay affect your benefits? If you’re claiming Universal Credit or other means-tested benefits, a redundancy payment counts as capital and could reduce or stop your payments. For 2025/2026, Universal Credit tapers off if your savings exceed £6,000, and you’re ineligible if they top £16,000. Non-cash benefits, like a company car, are also valued as capital.

Consider Tariq, a 40-year-old from Luton, who received a £28,000 redundancy payment in 2024. His Universal Credit was cut for six months because his savings jumped above £16,000. To avoid this, Tariq could’ve used part of his payout to clear debts or pay into a pension (see Part 2), reducing his capital. Check with the DWP Benefits Calculator to see how your payout might affect you.

Capital Amount	Universal Credit Impact (2025/2026)	Action to Take
Under £6,000	No impact	Monitor savings
£6,000–£16,000	Reduced by £4.35/month per £250 over	Consider pension contributions
Over £16,000	Ineligible	Clear debts or seek advice

Source: GOV.UK Universal Credit Rules

Using Redundancy Pay for Financial Planning

Right, let’s talk about turning your redundancy pay into a springboard for the future. That tax-free £30,000 ((or less) can be a game-changer if used wisely. Here are some smart moves:

• Pay Off High-Interest Debt: Clear credit cards or loans to reduce financial stress. For example, paying off a £10,000 credit card at 20% interest saves you £2,000 a year.

• Invest in Training: Use the cash to upskill. In 2024, Sian, a 47-year-old from Swansea, spent £5,000 of her redundancy pay on a coding bootcamp, landing a £40,000 tech job within months.

• Start a Business: If you’re entrepreneurial, redundancy pay can fund a startup. HMRC’s Seed Enterprise Investment Scheme offers tax relief for investors, which could stretch your funds.

• Emergency Fund: Stash 3–6 months’ worth of expenses in an easy-access savings account. With interest rates around 3–4% in 2025, this can grow modestly while keeping you secure.

Strategic Use of Redundancy Pay

Business Owners: Supporting Employees Post-Redundancy

So, if you’re an employer, how can you go beyond just paying out redundancy? Offering financial planning support can make a big difference. Some firms in 2025 started providing free sessions with financial advisors as part of redundancy packages, helping employees like Amandeep, a 50-year-old from Slough, allocate his £35,000 payout between pension contributions and debt repayment. This not only boosts morale but also reduces the risk of disputes over payments. Consider partnering with a local financial advisor or using.

Tax Planning for the Long Haul

None of us wants to be caught off-guard by taxes years down the line, so let’s wrap up with some long-term tax planning. If your redundancy pay is significant, it could affect your tax status for years—especially if you’re near the higher-rate threshold or have other income sources. Use HMRC’s Personal Tax Account to monitor your tax code and ensure it reflects your new income level. If you’re starting a business, register as self-employed promptly to claim deductions on startup costs.

A 2025 case study: Rohan, a 45-year-old from Oxford, used his £20,000 redundancy pay to launch a consultancy. By registering with HMRC and claiming expenses (like office equipment), he reduced his taxable income by £5,000 in his first year. Planning ahead saved him £1,000 in tax.

This part has tackled the trickier side of redundancy pay—legal settlements, HMRC disputes, benefits, and smart financial moves. You’re now equipped to handle the unexpected and make the most of your tax-free payout, whether you’re rebuilding your career or supporting your team through redundancies.

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Summary of the Most Important Points

1. The first £30,000 of redundancy payments in the UK is tax-free for the 2025/2026 tax year, covering both statutory and non-statutory amounts.

2. Statutory redundancy pay, capped at £21,570, is always tax-free and calculated based on age, service length, and a weekly pay cap of £719.

3. Payments like holiday pay, bonuses, or payments in lieu of notice (PILON) are fully taxable and don’t count toward the £30,000 tax-free limit.

4. Non-cash benefits, such as a company car, are valued by HMRC and can push your redundancy payment over the £30,000 limit, making the excess taxable.

5. Emergency tax codes (e.g., 0T Month 1) can over-tax the taxable portion of redundancy pay, but you can claim a refund by contacting HMRC or filing a Self Assessment.

6. Under-taxation can occur if your employer uses an incorrect tax code, potentially leading to a future HMRC bill, so estimate your total income to avoid surprises.

7. Spreading redundancy payments across tax years can maximise the £30,000 tax-free allowance per year, as seen in cases like Gareth’s £60,000 split payment.

8. Employers must report taxable redundancy amounts (above £30,000) via PAYE and pay 15% Class 1A National Insurance, while employees may need to declare these on Self Assessment.

9. Redundancy pay can be paid directly into a pension to avoid tax, as Aisha did with £20,000, but not all schemes allow this.

10. Legal settlements, benefits eligibility, and long-term financial planning (e.g., debt repayment or starting a business) require careful structuring to optimise tax efficiency and avoid disputes with HMRC.

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About the Author

Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of My Tax Accountant and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.

Email: info@mytaxaccountant.co.uk

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