A common question many people have is: is redundancy pay taxed? And given how confusing it all is, we’re not surprised. Losing a job because of redundancy can be tough, but having to figure out the ins and outs of redundancy pay makes it all the more overwhelming. 

The good news is that UK law allows some redundancy payments to be tax-free, but there are some rules you need to be aware of. Let’s explore how redundancy works, what tax applies, and how to check if you’re owed a refund. 

What is redundancy pay?

Redundancy pay is a financial cushion for employees who lose their job because the role is no longer needed. It’s designed to support workers while they look for new employment.

There are two main types of redundancy pay: 

  • Statutory redundancy pay: The minimum amount employers must pay if you’ve worked for them for at least two years.
  • Enhanced redundancy pay: Some employers offer additional payments beyond the statutory amount, based on contracts or company policies.

Who is eligible for redundancy pay?

To qualify for statutory redundancy pay in the UK, you must:

  • Have worked for your employer for at least two years.
  • Be classed as an employee (not self-employed or a contractor).
  • Be made redundant (not dismissed for misconduct or other reasons).

The amount you’ll receive depends on your age, salary, and length of employment. You can use the UK Government’s redundancy pay calculator for an estimate of what you’re entitled to.

Is redundancy pay taxed?

The UK tax system treats redundancy pay differently from regular wages. Some redundancy payments are tax-free, while others may be subject to deductions. 

  • Up to £30,000 of redundancy pay is tax-free. You won’t pay Income Tax or National Insurance on this portion.
  • Any amount over £30,000 is taxed. This is treated as earnings and taxed at your normal income tax rate.
  • National Insurance contributions (NICs) do not apply to redundancy pay, even on amounts above £30,000.

What counts toward the £30,000 tax-free limit?

Certain payments qualify for the £30,000 tax-free allowance:

  • Statutory redundancy pay: The legal minimum redundancy payment.
  • Compensation for loss of employment: If it’s genuinely compensation and not linked to your contract.

However, some payments do not count towards the tax-free allowance and are taxed as income: 

  • Accrued holiday pay: Any untaken holiday you’re paid for is taxed like wages.
  • Payments in lieu of notice (PILON): If your employer pays you instead of making you work your notice period, this is taxable.
  • Bonuses or commission owed: If you’re due extra earnings when you leave, these are taxed as normal pay.

Enhanced redundancy pay: how is it taxed?

If your employer offers an enhanced redundancy package (above the statutory amount), the tax-free threshold still applies.

For example: 

  • If your total redundancy package is £28,000, you receive it all tax-free.
  • If you receive £50,000, the first £30,000 is tax-free, and the remaining £20,000 is taxed as income.

Tax implications for other payments related to redundancy

Certain payments made alongside redundancy pay are taxed differently: 

  • Accrued holiday pay – Fully taxable and subject to National Insurance.
  • Payments in lieu of notice (PILON) – Usually taxable, depending on contract terms.
  • Ex-gratia payments – If not contractually owed, they may qualify for the £30,000 tax exemption.

How is tax deducted on redundancy pay above £30,000?

If your redundancy fee exceeds £30,000, your employer deducts tax via Pay As you Earn (PAYE) before paying you.

Example tax calculation

If you receive a redundancy payment of £40,000:

  • £30,000 is tax-free.
  • £10,000 is taxed at your Income Tax rate (e.g., 20% if you're a basic-rate taxpayer, 40% if you’re a higher-rate taxpayer).
  • You receive £8,000 after tax on the additional £10,000 (if taxed at 20%).

You can check your payslip or ask your employer for a breakdown of deductions.

How to claim a refund on overpaid tax for redundancy pay

Sometimes, too much tax is deducted from redundancy payments. This can happen if: 

  • Your employer incorrectly classifies part of your payment.
  • You were placed on an emergency tax code.
  • You had no further income after redundancy, meaning tax was over-calculated.

Tax refund: next steps

  • Check your final payslip and P45 to see how much tax was deducted.
  • Use your HMRC Personal Tax Account to check your tax position.
  • Submit a tax refund claim to HMRC if you think you’ve overpaid. You can do this online or by post.

Understanding redundancy tax rules can be complicated, but you don’t have to figure it out alone. If you think you’ve paid too much tax on redundancy pay, RIFT Refunds can help you check and claim back what’s yours.

Get expert tax advice today and make sure you’re not paying more tax than you need to.