Being made redundant is stressful enough without also trying to work out what's actually tax-free in the payout letter. Most people have heard that redundancy pay is tax-free up to £30,000, and that's broadly true, but it's also where the confusion usually starts, because a typical redundancy package contains several different types of payment, and only some of them get that treatment.
For how your final payslip and any ongoing income fit together, see our take-home pay calculator.
What Actually Gets the £30,000 Exemption
The exemption applies to genuine compensation for losing your job, statutory redundancy pay and any enhanced or ex-gratia payment your employer adds on top. Combined, these two elements can be paid entirely tax-free up to £30,000, with no Income Tax and no employee National Insurance deducted.
It's worth being precise about what "combined" means here. You don't get a separate £30,000 allowance for statutory pay and another one for the enhanced element, they share one £30,000 exemption between them. If your statutory and enhanced redundancy pay together exceed £30,000, only the amount above that threshold becomes taxable, taxed as income alongside whatever else you've earned in the tax year.
What Doesn't Qualify, Even Though It's Paid at the Same Time
This is where most of the confusion happens, since redundancy packages typically bundle several different payments together, and not all of them are redundancy pay in the tax sense.
Payment in lieu of notice, PILON, is always taxed as normal earnings, with full Income Tax and National Insurance deducted, regardless of how your contract describes it or whether you actually worked your notice period. This has been the rule since 2018, closing an older loophole where some employers structured notice pay to fall inside the tax-free exemption. If your redundancy package includes PILON, and most do, that portion is taxed exactly like a normal payslip, with no connection to the £30,000 allowance at all.
Accrued but untaken holiday pay works the same way. It's money you've already earned under your contract, so it's taxed as ordinary earnings, never as part of the redundancy exemption.
One genuine exception worth knowing about sits outside the £30,000 limit entirely rather than counting toward it. If your employer pays for outplacement counselling, career coaching, or retraining to help you find your next role, this is usually exempt from tax in its own right, separate from and in addition to the £30,000 allowance. It's a smaller, less commonly discussed benefit than the headline exemption, but worth factoring in if it's part of your package.
| Payment type | Tax treatment |
|---|---|
| Statutory redundancy pay | Tax-free, up to shared £30,000 limit |
| Enhanced/ex-gratia redundancy pay | Tax-free, up to shared £30,000 limit |
| Payment in lieu of notice (PILON) | Fully taxed as earnings |
| Accrued holiday pay | Fully taxed as earnings |
| Amount above £30,000 combined limit | Fully taxed as earnings |
A Worked Example
Someone receiving £6,000 statutory redundancy pay, £21,000 in enhanced ex-gratia compensation, and £15,000 in PILON has a total package worth £42,000.
The statutory and enhanced elements combined come to £27,000, comfortably under the £30,000 exemption, so all of it is paid tax-free. The £15,000 PILON gets no exemption at all and is taxed as normal earnings, alongside whatever else was paid earlier in the tax year. Out of a £42,000 package, £27,000 arrives tax-free and £15,000 is fully taxable, not the near-total exemption many people expect when they hear "redundancy pay is tax-free up to £30,000."
Statutory Redundancy Pay: How It's Calculated
If you have at least two years of service and are genuinely made redundant, you're entitled to statutory redundancy pay regardless of what else your employer offers on top. It's calculated from age, length of service, and weekly pay, capped at £751 a week for 2026/27, with a maximum of 20 years counted.
You get half a week's pay for each full year worked under age 22, a full week's pay for each year between 22 and 40, and one and a half weeks' pay for each year at 41 or older. Combined with the weekly pay cap, this puts an absolute ceiling on statutory redundancy pay of £22,530, meaning statutory pay alone can never exceed the £30,000 exemption on its own, whatever your salary.
National Insurance and Employer Costs
Employee National Insurance never applies to the genuine termination compensation covered by the £30,000 exemption, regardless of the amount, though it does apply as normal to PILON and holiday pay. Employers, separately, pay National Insurance on the portion of a termination payment above £30,000, a cost that sits with the employer rather than coming out of what you receive.
Worth knowing: If you haven't had a P45 processed yet when your redundancy pay is calculated, or you start a new job partway through the tax year, an emergency tax code can apply to any taxable portion of your payout, sometimes resulting in a much bigger deduction than expected in the short term. This usually self-corrects, covered in more detail in our emergency tax codes explained guide.
Redundancy Pay and the 60% Tax Trap
If a large redundancy payout, particularly the taxable elements like PILON, pushes your total income for the year over £100,000, the Personal Allowance taper applies exactly as it would to any other income, creating the same effective 60% marginal rate covered in our 60% tax trap guide. This is worth checking in advance if your package is substantial, since sacrificing part of a taxable redundancy payment into a pension can sometimes reduce or avoid this entirely.
Ask your employer: Ask specifically for a written breakdown of your package showing exactly which elements are statutory redundancy, enhanced redundancy, PILON, and holiday pay. This isn't just for your own understanding, it directly determines what gets taxed and what doesn't, and a clear breakdown makes it much easier to check the calculation is correct.
Common Mistakes
The single biggest one is assuming an entire redundancy package is tax-free simply because it's under £30,000 in total. As the worked example shows, PILON and holiday pay are taxed regardless of the total package size, so a £28,000 package that's mostly PILON can result in a meaningfully bigger tax bill than a £28,000 package that's mostly genuine redundancy compensation.
It's also easy to assume multiple payments from the same employer, if redundancy pay arrives in more than one instalment, each get their own £30,000 allowance. They don't. The exemption is shared across all qualifying payments from the same employment, not reset for each individual payment.