By Team SalaryCalculate · 9/24/2025
Redundancy can have significant tax implications that affect your take-home pay and financial planning. Understanding how different redundancy payments are taxed is crucial for making informed decisions about your financial future.
This comprehensive guide explains the tax treatment of redundancy payments, including the £30,000 tax-free threshold, how different components are taxed, and strategies for minimizing your tax bill during redundancy.
The £30,000 Tax-Free Threshold
The most important tax rule for redundancy is the £30,000 tax-free threshold. This applies to the total of all redundancy-related payments you receive, not just statutory redundancy pay.
Tax-free elements include:
• Statutory redundancy pay (up to £21,570 in 2025)
• Enhanced redundancy pay
• Ex-gratia payments
• Compensation for loss of employment
• Long service awards
What's NOT Tax-Free
Some redundancy-related payments are always subject to tax and National Insurance, regardless of the £30,000 threshold:
• Notice pay (whether worked or paid in lieu)
• Holiday pay
• Performance bonuses
• Garden leave pay
• Any payment for work done
Tax Calculation Examples
Let's look at how tax works in practice with different redundancy scenarios:
| Scenario | Tax-Free Amount | Taxable Amount | Tax Due (20%) | Tax Due (40%) |
|---|---|---|---|---|
| Small package (£15,000 total) | £15,000 | £0 | £0 | £0 |
| Medium package (£35,000 total) | £30,000 | £5,000 | £1,000 | £2,000 |
| Large package (£60,000 total) | £30,000 | £30,000 | £6,000 | £12,000 |
| High earner (£100,000 total) | £30,000 | £70,000 | £14,000 | £28,000 |
Use our redundancy pay calculator to work out exactly how much tax you'll pay on your specific redundancy package.
National Insurance Implications
National Insurance (NI) works differently from income tax for redundancy payments. The £30,000 threshold applies to both tax and NI, but there are some important differences.
NI treatment of redundancy payments:
• First £30,000: No NI due
• Excess over £30,000: 2% NI on the excess
• Notice pay: Always subject to normal NI rates
• Holiday pay: Always subject to normal NI rates
Pension Tax Implications
Redundancy can have significant implications for your pension planning. Use our redundancy pension calculator to understand how redundancy affects your retirement planning and tax position.
Key pension tax considerations:
• Pension contributions stop on your last working day
• You may be able to make additional contributions before redundancy
• Consider pension transfer options for new employment
• Early retirement may trigger tax charges
Tax Planning Strategies
There are several strategies you can use to minimize the tax impact of redundancy:
• Maximize pension contributions before redundancy
• Consider spreading payments across tax years
• Use your personal allowance effectively
• Consider ISA investments for tax-free growth
• Plan your income for the following tax year
Severance Package Tax Planning
When negotiating your severance package, consider the tax implications of different components. Use our redundancy severance calculator to model different scenarios and optimize your package for tax efficiency.
Tax-efficient package components:
• Enhanced redundancy pay (tax-free up to £30,000)
• Outplacement support (usually tax-free benefit)
• Extended benefits (health insurance, etc.)
• Training and development opportunities
Tax-Free Lump Sum Strategies
The £30,000 tax-free threshold is a valuable opportunity for tax planning. Learn more about redundancy tax-free lump sums and how to maximize this benefit.
Strategies for maximizing your tax-free amount:
• Negotiate for higher redundancy pay rather than bonuses
• Include long service awards in the tax-free calculation
• Consider ex-gratia payments for additional tax-free amount
• Plan timing to maximize your personal allowance
Financial Planning After Redundancy
Redundancy creates unique financial planning opportunities and challenges. Learn comprehensive strategies for redundancy financial planning to make the most of your redundancy package.
Key financial planning considerations:
• Emergency fund requirements
• Investment opportunities with tax-free money
• Pension planning and contributions
• Tax-efficient investment strategies
Frequently Asked Questions
Q: Is the £30,000 threshold per employer or lifetime?
A: The £30,000 threshold applies per redundancy event, not per employer or lifetime. If you're made redundant multiple times, you get the threshold each time.
Q: Can I spread redundancy payments across tax years?
A: Yes, if your employer agrees, you can structure payments to span tax years. This can help optimize your tax position and use multiple personal allowances.
Q: Do I need to declare redundancy payments on my tax return?
A: Yes, you must declare all redundancy payments on your tax return, even if they're tax-free. HMRC needs to see the full picture to ensure correct tax treatment.
Q: What happens if I receive redundancy pay in a different tax year?
A: The tax treatment depends on when the payment is made, not when the redundancy occurs. Payments made after your employment ends are still subject to the same tax rules.
Understanding the tax implications of redundancy is crucial for making informed financial decisions. The £30,000 tax-free threshold provides valuable opportunities for tax planning, but it's important to understand how different payment types are treated.
Use the calculators and resources available to model different scenarios, and consider seeking professional tax advice for complex situations to ensure you're making the most of your redundancy package.
