Redundancy Pay Tax-Free Amount Calculator

The first £30,000 of a genuine redundancy payment is exempt from income tax and NIC. This limit includes statutory redundancy pay and any contractual or ex-gratia redundancy payment. Amounts above £30,000 are taxable as employment income at your marginal rate.

No — since April 2018, PILON is always taxable as employment income regardless of whether the employment contract includes a PILON clause. The full PILON amount is subject to income tax and both employee and employer National Insurance. It does not use up any of the £30,000 exemption.

Yes — statutory redundancy pay counts towards the £30,000 exemption. If you receive £8,500 statutory pay and £35,000 total, the excess £6,500 is taxable. Statutory pay in itself is always tax-free, but it reduces the amount of any additional payment that can be received tax-free.

Yes — a redundancy lump sum above £16,000 can affect eligibility for Universal Credit and income-based JSA/ESA (means-tested benefits). The capital would be assessed against the £16,000 capital limit. Tax-free or not, the capital rules apply to actual cash received.

Yes — contributing redundancy pay to a pension is tax-efficient. As long as you have earnings of at least the contribution amount in the same tax year (actual earnings, not the redundancy lump sum itself), you can contribute up to the annual allowance (£60,000 in 2026). Pension contributions can reduce higher-rate tax on the redundancy excess.

Genuine redundancy means the job role is no longer needed. If a payment is actually in lieu of notice, compensation for breach of contract, payment to sign a settlement agreement, or disguised remuneration, HMRC may challenge the tax-free treatment. Documentation showing the genuine redundancy situation is important.

Compensation payments in a settlement agreement may qualify for the £30,000 exemption if they represent compensation for loss of employment (injury to feelings, unfair dismissal damages). However, payments that represent deferred remuneration, contractual bonuses, or other employment income are fully taxable. Legal costs paid directly to your solicitor are also tax-free.

The employer deducts income tax through PAYE. They apply the £30,000 exemption automatically. If the tax band is unclear (e.g., the excess pushes you into higher rate territory), the employer may use an emergency tax code, and you would claim back any overpayment via Self Assessment or by contacting HMRC.