A redundancy offer usually arrives as one number. The payslip that follows splits it into four or five lines, taxes some of them and not others, and the figure that lands in your account is smaller than the letter suggested.
Knowing which parts are taxed before you sign is the difference between a shortfall and a plan.
What is actually in a redundancy package?
Most packages are built from the same components, and each one has its own tax treatment.
| Component | What it is | Tax treatment |
|---|---|---|
| Statutory redundancy pay | The legal minimum, set by your age and length of service | Free of tax and National Insurance within the £30,000 exemption |
| Enhanced or ex gratia redundancy pay | Anything your employer adds above the statutory minimum | Shares the same £30,000 exemption |
| Pay in lieu of notice | Payment instead of working your notice period | Earnings. Income tax and National Insurance in full |
| Holiday pay | Annual leave you accrued but did not take | Earnings. Income tax and National Insurance in full |
| Unpaid wages, bonus, commission | Work you had already done | Earnings. Income tax and National Insurance in full |
Our redundancy pay calculator works out the statutory element from your age, service and weekly pay. The rest of the package is whatever your employer has offered on top.
How much of it is tax free?
Genuine redundancy pay is free of income tax and National Insurance up to £30,000. Statutory and enhanced redundancy pay both count towards that one limit, so the exemption is shared rather than applied twice.
- Tax free
- Taxed as income
The exemption covers the redundancy element only. The first £30,000 is free of income tax and of National Insurance; anything above it is taxed as income but still carries no employee National Insurance.
Above £30,000 the excess is taxed as income at your marginal rate. A large package can therefore push you into a higher rate band in the year you are made redundant, even if your salary never came close to it.
The £30,000 covers the redundancy element only. Notice pay and holiday pay do not use it up and do not benefit from it, which is why a £25,000 package can still arrive with tax deducted.
Why is notice pay taxed when redundancy pay is not?
Because it is pay for work, in the eyes of the law, even when you do not do the work.
Since April 2018, payment instead of notice is treated as earnings through the post-employment notice pay rules. The amount you would have earned during your notice period is taxed as if you had worked it, with National Insurance, whatever the settlement agreement calls it. Labelling it compensation does not change the treatment.
- Tax free
- Taxed as income
Statutory and enhanced redundancy pay share the £30,000 exemption. Notice pay and holiday pay are earnings and are taxed in full, however small the rest of the package is.
The length of the notice period is what sets the size of that taxed slice, so it is worth knowing what you are entitled to. Our notice period calculator gives the statutory minimum, and our guide to how much notice an employer must give explains where a contract can improve on it.
Do you pay National Insurance above £30,000?
You do not. Your employer does.
On a qualifying termination award above £30,000, employer Class 1A National Insurance is due on the excess. HMRC’s own manual is unambiguous that the charge “does not introduce a NICs liability on the employee”, and that there “remains an unlimited employee NICs exemption on termination awards”.
So a £45,000 redundancy payment costs you income tax on £15,000 and no National Insurance at all. That is unusual, and it is the one part of a redundancy package that is treated more kindly than ordinary pay.
What happens to holiday you never took?
It must be paid. Accrued but untaken statutory holiday is paid out when you leave, and it is taxed as ordinary earnings.
Work out what you accrued before you accept the figure in the letter. Entitlement builds up across the leave year, so leaving in August with 28 days a year means you have earned roughly two thirds of it. Our holiday entitlement calculator gives the full-year figure for your working pattern, and our guide on whether bank holidays count matters here too, because a contract that includes them changes the number of days you are counting.
How is the tax collected, and will you get a refund?
Through payroll, on your final payslip, using whatever tax code you are on at the time.
Payroll works out the tax as though you were going to keep earning at that rate for the rest of the year. If you are made redundant in June and do not work again until October, too much tax has been taken. Real overpayments of several hundred pounds are common in that situation.
The correction happens either when your next employer applies a cumulative tax code, or after the tax year ends through HMRC. Compare the deduction against what the take-home pay calculator shows for a full year on your old salary, and if your final payslip took far more, the difference is probably sitting with HMRC waiting to come back.
Can the payment go into your pension instead?
Ask. It is the question that moves the most money on a large package.
Where an employer pays part of a termination settlement directly into your pension as an employer contribution, that part is generally not taxed as income at all, which matters for any amount above the £30,000 exemption. The sum still has to fit within your pension annual allowance, unused allowance from earlier years can sometimes be carried forward, and a very high earner has a reduced allowance to work with.
This is the one part of a redundancy negotiation where paid advice tends to pay for itself. Get the figure checked against your own allowance before you agree to it, because an over-contribution brings its own tax charge.
What should you check before you sign?
- The split, not just the total. Ask for the offer broken down into redundancy, notice, holiday and anything else. Two £30,000 offers can differ by thousands after tax.
- Whether your service crosses another year. Statutory redundancy pay goes up a step at each completed year, and working your notice can take you past one.
- Whether the redundancy element uses the full £30,000. If it does not, there may be room to move value from a taxed line into the redundancy line.
- Your tax code on the final payslip. It decides how much is deducted on the day, and it is the most common reason a figure looks wrong.
A settlement agreement needs independent legal advice before it binds you, and your employer normally pays a contribution towards it. Use it. Nothing here is legal or tax advice, and the numbers are estimates based on the figures you enter.