Is redundancy pay tax free?

Statutory redundancy pay is tax-free provided your total qualifying termination payment does not exceed £30,000. The £30,000 threshold applies to the combined value of statutory redundancy pay, any enhanced (contractual) redundancy pay, and any ex gratia payment made on termination. Amounts within this threshold are exempt from both income tax and National Insurance contributions.

If your total termination payment exceeds £30,000, only the excess above £30,000 is subject to income tax (at your marginal rate). Importantly, National Insurance contributions do not apply to the excess — it is income tax only on amounts above the threshold.

Notice pay (or pay in lieu of notice — PILON) is always fully taxable and does not benefit from the £30,000 exemption. Since April 2018, all PILON is treated as earnings regardless of whether your contract contains a PILON clause. When calculating what falls within the threshold, PILON is kept separate. For example: if you receive £15,000 redundancy pay and £10,000 PILON, the redundancy pay is tax-free (within £30,000) and the PILON is fully taxable as earnings.