The first £30,000 of redundancy pay is tax free — but that exemption is narrower than almost everyone assumes, and notice pay falls entirely outside it.
The short answer
- Redundancy pay — first £30,000 free of income tax and National Insurance. Above that, income tax applies but National Insurance still does not.
- Pay in lieu of notice — fully taxable, with National Insurance. No part of the exemption applies.
- Holiday pay — fully taxable, with National Insurance.
- Contractual bonus owed — fully taxable, with National Insurance.
Three things people get wrong
1. It covers the redundancy payment, not the package
Employers frequently present an offer as "£30,000 tax free". Usually it is not. The exemption applies only to genuine termination payments — statutory redundancy pay plus any enhanced or ex-gratia element. Everything else in the package is ordinary earnings.
2. It is one £30,000 in total
Not per payment, not per element, and not renewed if payments straddle two tax years. It is a single £30,000 across everything arising from the same employment.
3. Notice pay is taxable however it is labelled
Since April 2018 the post-employment notice pay rules mean payment in lieu of notice is taxed as earnings regardless of what your contract says or how the payment is described. The old distinction between contractual and non-contractual PILON no longer helps.
A worked example
Someone made redundant in October, having earned £30,000 so far that tax year, receiving:
| Element | Amount | Treatment |
|---|---|---|
| Redundancy pay | £28,000 | Within the exemption — tax free |
| Pay in lieu of notice | £9,000 | Fully taxable, plus NI |
| Holiday pay | £1,500 | Fully taxable, plus NI |
| Income tax | £2,100 | |
| National Insurance | £840 | |
| Actually received | £35,560 |
£2,940 of tax on a package presented as largely tax free — all of it on the £10,500 of notice and holiday pay. Work out your own package.
How to reduce the tax
Pay it into a pension
The most effective option by far. An employer contribution paid directly from the package escapes income tax and National Insurance entirely — including on the taxable elements. Watch the £60,000 annual allowance, and check your scheme will accept a contribution once employment has ended.
Consider the timing
The package is taxed in the year you receive it, stacked on income already earned. Being made redundant late in a tax year, when your allowance and basic rate band are used up, pushes more into higher rate. Where there is any flexibility about the leaving date, model both sides of 6 April.
Check your tax code afterwards
Employers often apply an emergency code to a final payment, which frequently overtaxes it. If you do not start a new job immediately you can reclaim using form P50, or P53 for a lump sum, rather than waiting until the year end.
What about the redundancy itself?
Statutory redundancy pay for 2026/27 uses a weekly pay cap of £751 — £783 in Northern Ireland — giving a statutory maximum of £22,530. Many employers pay more under a contractual scheme, so check your contract and staff handbook. Calculate your entitlement.
If you are offered one, you must take independent legal advice for it to be binding — and the employer normally pays for it. Use that advice. It is the point at which the numbers can still change, and Acas offers free guidance on the redundancy process itself.