Statutory redundancy pay is tax free, and always will be — the statutory maximum for 2026/27 is £22,530 in Great Britain, comfortably below the £30,000 exemption.
The complications start when your employer pays more than the statutory minimum, or when part of what you are offered is really notice pay wearing a different name.
The first £30,000 is free of both income tax and National Insurance. Only the excess is taxed — and employee National Insurance is not charged on any of it, however large the payment.
The £30,000 exemption
The first £30,000 of a qualifying termination payment is exempt from both income tax and National Insurance.
Above £30,000, the excess is subject to income tax and to employer Class 1A National Insurance. It is not subject to employee National Insurance. So a £40,000 payment leaves you paying income tax on £10,000, but no NI of your own on any of it.
What counts towards the £30,000, and what doesn’t
This is where most explanations go wrong, so it is worth being precise.
Automatically exempt, and not a “relevant termination award” at all:
- Statutory redundancy pay
Counts as a relevant termination award, so eligible for the exemption but not automatically:
- Enhanced or contractual redundancy pay
- Compensation for loss of office
- Ex gratia payments
Never covered by the exemption, taxed in full as earnings:
- Pay in lieu of notice
- Accrued but untaken holiday pay
- Outstanding salary, bonuses and commission
That last group is the one that catches people. Someone offered “£35,000 to leave” often assumes £30,000 arrives untaxed. If £12,000 of it is notice pay and holiday, that £12,000 is taxed as normal earnings before the exemption is applied to anything else.
Pay in lieu of notice is always taxable
Since April 2018 all pay in lieu of notice is treated as earnings and taxed in full through PAYE, with employee and employer National Insurance. The £30,000 exemption does not apply to it.
This applies whether or not your contract has a PILON clause. HMRC’s post-employment notice pay rules calculate an amount equivalent to your unworked notice and tax it as earnings regardless of how the payment is labelled.
The rules exist specifically to stop employers dressing notice pay up as compensation to shelter it under the exemption. See our guide to pay in lieu of notice for how the calculation works.
A worked example
Sarah is made redundant after 10 years. She is 46 and earns £650 a week. Her employer offers a total package of £45,000, made up of:
- Statutory redundancy pay: £8,125
- Enhanced redundancy payment: £24,875
- Pay in lieu of 3 months’ notice: £8,450
- Accrued holiday: £3,550
How it is taxed:
| Element | Treatment |
|---|---|
| Statutory redundancy £8,125 | Tax free, does not use up the exemption |
| Enhanced payment £24,875 | Relevant termination award — within the £30,000, tax free |
| PILON £8,450 | Taxed in full as earnings, plus employee and employer NI |
| Holiday pay £3,550 | Taxed in full as earnings, plus NI |
Sarah pays tax and National Insurance on £12,000, and receives £33,000 free of both.
Work out your own statutory entitlement
A common employer error worth knowing about
Some employers apply tax and National Insurance to a negotiated payment that is not genuinely notice pay, on the assumption that anything called PILON must be taxed.
If there was no PILON clause, the payment was part of a negotiated settlement, and the post-employment notice pay calculation produces nil, the payment may be covered by the £30,000 exemption after all. Both you and your employer could be due a refund.
This is genuinely complex territory and the figures are usually large enough to justify proper advice. If your package is substantial, an employment solicitor or an accountant is worth the fee.
Other points
Payments into a pension. Directing part of a termination payment into a registered pension scheme can be tax efficient, subject to annual allowance rules.
Payments for injury or disability. Compensation for genuine injury or disability that caused you to leave can be exempt, separately from the £30,000.
Settlement agreements. Signing one does not change the tax treatment. What matters is what each element of the payment actually is, not what the agreement calls it.
Timing. The exemption applies per termination, not per tax year. Splitting a payment across two tax years does not give you two exemptions.
Sources
- Redundancy: tax and National Insurance — GOV.UK
- EIM13876: post-employment notice pay — HMRC Employment Income Manual
- Calculate your statutory redundancy pay — GOV.UK
Checked against source on 30 August 2026. This is general guidance, not tax advice. Termination payments are complex and the sums are often large — take professional advice on anything substantial.
Written by Nathan Cole
I built the calculators on HoursHQ and check every statutory figure against GOV.UK, Acas and the legislation itself before it goes live. Where the law is genuinely unclear, I say so rather than guessing.