Redundancy
Redundancy pay and tax: what the £30,000 threshold covers
A leaving package mixes payments that are taxed like wages with payments that are taxed only above a threshold; the split is decided by what each payment is for, not by what it is called.
Checked by Radif Partners · Editorial policy · Method and sources
Under section 403 of the Income Tax (Earnings and Pensions) Act 2003, the first £30,000 of payments made because your employment ends is not taxed. Statutory redundancy pay, enhanced or ex gratia redundancy pay and non-cash leaving benefits are added together, along with any similar payments from the same or an associated employer, and only the part above £30,000 is taxed; the employer also pays Class 1A National Insurance at 15 % on that excess, and you pay no National Insurance on it. Everything that rewards work is outside the threshold and goes through PAYE like a normal payslip: notice pay, whether worked or paid in lieu, pay for gardening leave, holiday pay, unpaid wages and bonuses. Since 6 April 2018 a part of any severance equal to basic pay for unworked notice, called post-employment notice pay, is also taxed as earnings. The statutory redundancy payment itself, which cannot exceed £22,530, never carries tax on its own.
Which part of your package sits under the £30,000 threshold?
Inside the threshold
£30,000
| Redundancy pay above the threshold | £7,000 |
| Taxed as earnings like wages | £5,200 |
| Employer Class 1A on the excess | £1,050 |
Gross amounts only. The share above the threshold and the earnings go through PAYE.
Three kinds of money in one payslip
HMRC sorts a leaving package by its purpose. Payments that reward work done or notice owed are earnings. Payments made because the job has ended are termination awards, taxed only above the threshold. A few payments are outside both.
| Payment | How it is treated | Under the threshold? |
|---|---|---|
| Statutory redundancy pay | Termination award | Yes |
| Enhanced, contractual or ex gratia redundancy pay | Termination award, minus any post-employment notice pay | Yes |
| Company car or laptop you keep | Termination award at its value | Yes |
| Notice pay, worked or paid in lieu | Earnings | No |
| Gardening leave pay | Earnings | No |
| Holiday pay for untaken leave | Earnings | No |
| Unpaid wages, bonus, commission | Earnings | No |
| Payment for a restrictive covenant | Earnings | No |
| Employer pension contribution to a registered scheme | Not taxed as a termination payment | Not needed |
| Your legal costs paid directly to your solicitor | Not taxed | Not needed |
How the threshold is applied
The £30,000 is not an allowance per payment. HMRC first adds up every termination award paid to you in connection with the job, including from associated employers (EIM13530), then exempts the first £30,000 of the total (EIM13505). Statutory redundancy pay counts towards that total, but on its own it can never reach the threshold: even the largest statutory payment is well below it.
Above the threshold, the excess is added to your income for the year and taxed at your marginal rate. The employer adds Class 1A National Insurance of 15 % on that excess, a cost to the employer that does not appear on your payslip (HMRC rates and thresholds 2026 to 2027).
A package split, step by step
An engineer aged 55, employed since 15 May 2006 on £1,050 a week, is made redundant with pay in lieu of 12 weeks’ notice, a statutory payment of £20,277 (capped at £751 a week), an enhanced redundancy payment of £26,000 and six days of untaken holiday.
| Element | Amount | Treatment |
|---|---|---|
| Statutory redundancy pay | £20,277 | Inside the threshold |
| Enhanced redundancy pay | £26,000 | Inside, then above the threshold |
| Pay in lieu of notice | £12,600 | Earnings |
| Holiday pay | £1,260 | Earnings |
| Redundancy pay inside the threshold | £30,000 | Not taxed |
| Redundancy pay above the threshold | £16,277 | Taxed; employer Class 1A £2,442 |
| Earnings through PAYE | £13,860 | Taxed and Class 1 NIC |
Because the notice was paid in lieu, it is already taxed as earnings, and no further post-employment notice pay comes out of the enhanced payment. Of the £60,137 in total, £30,000 reaches the engineer without deductions.
A smaller case for comparison: statutory pay of £6,200, a goodwill payment of £4,000, six weeks’ notice at £520 and three days’ holiday. The £10,200 of redundancy pay sits entirely inside the threshold; the £3,432 of notice and holiday pay is taxed like any wage.
Post-employment notice pay
Before April 2018 an employer could leave notice unworked, pay nothing labelled “notice”, and fold the money into a larger tax-free severance. The rules in sections 402A to 402E of the 2003 Act closed that route (EIM13874). When notice is not worked in full, the employer must work out the basic pay you would have earned in the unworked part. That amount, post-employment notice pay, is taken out of any severance or enhanced payment and taxed as earnings. If 4 weeks of notice at £650 a week go unworked and nothing is paid in lieu, £2,600 of the severance becomes taxable pay.
The rule never touches statutory redundancy pay. Where the post-employment notice pay is larger than the severance itself, only the severance actually paid is taxed, as GOV.UK’s own examples show.
Payslip checks
- The redundancy elements should appear separately from salary, notice and holiday pay.
- No employee National Insurance should come off the redundancy elements.
- If the money was paid after your P45, tax will have been taken at the 0T code; any overpayment is recoverable.
- If you file a Self Assessment return, the termination payment goes in the additional information pages.
To total the gross figures before tax, the final pay calculator adds redundancy, notice and holiday pay and shows the same split. How notice pay itself is worked out is covered under payment in lieu of notice.