Is redundancy pay taxable?

A common UK rule is that genuine redundancy compensation can be tax-free up to GBP 30,000. But final termination statements usually include several lines, and not all lines are treated as redundancy compensation for tax.

What is often tax-free

• Statutory redundancy pay.
• Contractual redundancy compensation (subject to rules and limits).

These are commonly the amounts people mean when they say "redundancy payment".

What is usually taxed as earnings

• Notice pay (including PILON in many cases).
• Holiday pay owed at termination.
• Outstanding wages, overtime, bonuses, or commission.

These items generally go through PAYE and can change your net result significantly.

Simple example

Example statement: redundancy compensation GBP 18,000, notice pay GBP 4,000, holiday pay GBP 1,200. The redundancy compensation may be tax-free, while notice and holiday pay are usually taxable as employment income. Two employees with the same statutory weeks can still receive different net amounts because their non-redundancy lines differ.

Why people get confused

Employers often label multiple amounts in one settlement table. If a line is not clearly tagged, ask for a written split showing what is treated as redundancy compensation and what is treated as taxable earnings.

Checks before you accept the final figure

• Request a written line-by-line breakdown before signing.
• Check redundancy and notice lines are separate.
• Compare payroll deductions against each line type.
• If you are also withdrawing pension in the same tax year, consider combined tax impact.

Use the redundancy calculator for statutory estimates, then compare with your employer's full payment table.

Official sources

• GOV.UK: Redundancy rights
• GOV.UK: Redundancy pay details
• GOV.UK: Explaining redundancy payments
• Acas: Redundancy pay

Information only, not legal or tax advice.