Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
The first £30,000 of a genuine redundancy payment is free of income tax, and no employee National Insurance is due on any part of a qualifying termination payment, whatever its size [1]. Statutory redundancy pay is capped at £22,530 for a dismissal on or after 6 April 2026, which sits comfortably below the £30,000 line, so the statutory element is always received in full [2].
That headline hides a more complicated reality. A redundancy package is rarely a single figure. It usually bundles together statutory redundancy pay, holiday pay, unpaid wages, notice pay and sometimes a discretionary ex-gratia sum, and each of those elements is taxed under different rules. Treating the whole payment as tax-free because the statutory part is exempt is one of the most common and expensive mistakes in a leaver's final pay.
This article sets out which parts of a redundancy payment are taxable and which are not, how the £30,000 exemption works, why notice pay is treated as ordinary earnings, how National Insurance falls on employers rather than employees, and the practical steps a payroll team follows to get a leaver's final settlement right.
Key takeaways
- The first £30,000 of a qualifying redundancy payment is exempt from income tax, and employee National Insurance is never charged on a termination payment [1].
- Statutory redundancy pay is capped at £22,530 from 6 April 2026, so it always falls within the tax-free band [2].
- Notice pay, holiday pay and unpaid wages are taxed as normal earnings through PAYE, with full National Insurance, and do not count towards the £30,000 exemption [3].
- Any amount above £30,000 is subject to income tax at the individual's marginal rate and to employer Class 1A National Insurance at 15% [4].
- Only an employee with at least two years' service qualifies for statutory redundancy pay, and a claim must be made within six months of the job ending [2].
What counts as a termination payment
When an employer makes someone redundant, the money paid on the way out is described collectively as a termination payment. HMRC treats it as a package of distinct components rather than one lump sum, and the tax treatment turns entirely on which box each pound falls into [1]. A typical redundancy settlement can include statutory redundancy pay, any enhanced or contractual redundancy pay the employer chooses to add, pay in lieu of notice, accrued but untaken holiday, outstanding salary, and occasionally a bonus or a discretionary goodwill payment [3].
The reason this matters is that two settlements of identical headline value can produce very different net figures. A £35,000 package that is mostly statutory and enhanced redundancy pay is taxed lightly, while a £35,000 package weighted towards notice pay and a bonus is taxed heavily. The split, not the total, drives the tax bill [5].
The two tax buckets
Every element of a termination payment lands in one of two buckets. The first bucket holds payments that are earnings in the ordinary sense: wages, notice pay, holiday pay and contractual bonuses. These are taxed exactly as if the employee had stayed, through PAYE, with income tax and full National Insurance [3]. The second bucket holds genuine compensation for loss of the job, principally statutory and enhanced redundancy pay, and it is this bucket that benefits from the £30,000 exemption [5].
An employer running the final payroll has to sort each line into the right bucket before any tax is calculated. Modern HMRC-recognised payroll software for SMEs applies the split automatically, but the logic still needs to be understood, because a misclassified notice payment can leave both employer and employee with an unexpected liability [6].
How the £30,000 tax-free rule works
The £30,000 exemption applies to the compensation bucket only. Statutory redundancy pay, plus any enhanced redundancy or ex-gratia compensation for loss of office, is added together, and the first £30,000 of that total is free of income tax [1]. The exemption is a single allowance covering the whole termination, not a separate £30,000 for each component, and it applies to the total of all qualifying payments arising from the same employment [5].
Employee National Insurance is not charged on a qualifying termination payment at all, even on the portion above £30,000 [3]. This is the one respect in which termination pay is treated more favourably than ordinary earnings: the employee keeps the full 8% or 2% that National Insurance would otherwise take from salary [4].
Because statutory redundancy pay is capped well below the threshold, the statutory figure is always received tax-free. The cap for a dismissal on or after 6 April 2026 is a weekly pay of £751 and a maximum total of £22,530, which is £7,470 short of the exemption ceiling [2]. The £30,000 line only bites when an employer adds a generous enhanced or contractual redundancy payment on top.
What happens above £30,000
The amount by which the compensation bucket exceeds £30,000 is taxable. It is added to the individual's other income for the tax year and taxed at their marginal rate, which means a higher-rate taxpayer pays 40% on the excess and an additional-rate taxpayer 45% [7]. A redundancy in the middle of a tax year, following several months of salary, can push the excess into a higher band than the individual expects [8].
Since 6 April 2020, the excess above £30,000 also attracts employer Class 1A National Insurance, and that charge rose with the main employer rate to 15% on 6 April 2026 [4]. The employer, not the employee, carries this cost, so a large enhanced package is more expensive to the business than the headline figure suggests [6]. The table below shows how a £45,000 compensation payment splits.
| Element | Amount | Income tax | Employee NI | Employer NI |
|---|---|---|---|---|
| Tax-free band | £30,000 | None [[1]](https://www.gov.uk/redundancy-your-rights/tax-and-national-insurance) | None [[3]](https://www.gov.uk/termination-payments-and-tax-when-you-leave-a-job/what-you-pay-tax-and-national-insurance-on) | None |
| Taxable excess | £15,000 | Marginal rate [[7]](https://www.gov.uk/income-tax-rates) | None [[3]](https://www.gov.uk/termination-payments-and-tax-when-you-leave-a-job/what-you-pay-tax-and-national-insurance-on) | 15% [[4]](https://www.gov.uk/national-insurance-rates-letters) |
Why notice pay is always taxable
The single biggest source of confusion is notice pay. When an employer pays someone to leave without working their notice, that payment is called pay in lieu of notice, or PILON, and it is taxed in full as earnings [3]. It attracts income tax through PAYE and both employee and employer National Insurance, and it does not use up any part of the £30,000 exemption [9].
Since 6 April 2018, HMRC has required employers to identify the notice element of any termination payment even where the contract has no PILON clause. This is done through a calculation called Post-Employment Notice Pay, or PENP, which works out the basic salary the employee would have earned during any unworked notice period [9]. Statutory notice periods themselves run from one week after a month's service up to a maximum of 12 weeks, so the notice element can be a substantial slice of a settlement [15]. Whatever the PENP figure comes to is stripped out of the tax-free bucket and taxed as ordinary earnings, so employers can no longer dress notice pay up as tax-free compensation [5].
Holiday pay and unpaid wages
Accrued but untaken holiday paid on departure is earnings, taxed through PAYE with full National Insurance, and it never counts towards the £30,000 exemption [3]. The same is true of any salary still owed for the final period worked, and of a contractual bonus that has been earned [6]. These figures usually appear on the leaver's final payslip and feed into the P45 in the normal way, which is why an accurate instant payslip generator matters as much for a leaver as for a new starter [10].
The table below sorts the common components of a redundancy package into the two tax buckets.
| Component | Taxed as earnings | Qualifies for £30,000 exemption |
|---|---|---|
| Statutory redundancy pay | No | Yes [[1]](https://www.gov.uk/redundancy-your-rights/tax-and-national-insurance) |
| Enhanced or ex-gratia redundancy | No | Yes [[5]](https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13760) |
| Pay in lieu of notice (PILON / PENP) | Yes | No [[9]](https://www.gov.uk/termination-payments-and-tax-when-you-leave-a-job/how-tax-and-national-insurance-are-deducted) |
| Accrued holiday pay | Yes | No [[3]](https://www.gov.uk/termination-payments-and-tax-when-you-leave-a-job/what-you-pay-tax-and-national-insurance-on) |
| Unpaid wages and earned bonus | Yes | No [[6]](https://www.gov.uk/staff-redundant/tax-when-making-staff-redundant) |
How statutory redundancy pay is calculated
Statutory redundancy pay is the legal minimum an employer owes an employee with at least two years' continuous service [2]. It is worked out from three factors: the employee's age across each year of service, the length of service capped at 20 years, and a week's pay capped at the statutory weekly limit [11]. The age bands determine how many weeks' pay accrue for each year served.
The statutory formula gives half a week's pay for each full year worked under the age of 22, one week's pay for each full year between 22 and 40, and one and a half week's pay for each full year aged 41 or over [2]. A week's pay is the gross average earned over the 12 weeks before the redundancy notice, capped at £751 for a dismissal on or after 6 April 2026 [11]. The table sets out the age multipliers.
| Age during each year of service | Weeks' pay per year |
|---|---|
| Under 22 | 0.5 [[2]](https://www.gov.uk/redundancy-your-rights/redundancy-pay) |
| 22 to 40 | 1.0 [[2]](https://www.gov.uk/redundancy-your-rights/redundancy-pay) |
| 41 and over | 1.5 [[2]](https://www.gov.uk/redundancy-your-rights/redundancy-pay) |
Because service is capped at 20 years and a week's pay at £751, the theoretical maximum is 20 years at 1.5 weeks each, giving 30 weeks at £751, which is the £22,530 ceiling [11]. An employee can claim statutory redundancy pay for up to six months after the job ends, and certain groups, including some crown servants and share fishermen, are excluded [2]. Accountants running this across a client base often lean on a multi-client payroll dashboard to apply the age bands and weekly cap consistently for every scheme [6].
Reducing the tax on a large redundancy payment
Where a compensation payment exceeds £30,000, the taxable excess can sometimes be reduced by paying part of it into a pension. An employee can ask the employer to pay some or all of the payment as an employer pension contribution, an arrangement often called redundancy sacrifice, and that contribution goes into the pension without income tax or National Insurance being deducted first [12]. For a higher-rate taxpayer facing 40% on the excess, redirecting it to a pension can be materially more efficient than taking it as cash [13].
There are limits. Only the part of a redundancy payment above the £30,000 exemption counts as relevant UK earnings for pension purposes, and personal contributions attract tax relief only up to the higher of £3,600 or 100% of relevant earnings [12]. An employer contribution routed straight from the redundancy payment is not constrained in the same way, which is why the sacrifice route is common for larger settlements [13]. Anyone considering this should take regulated financial advice, because pension allowances and the tapered annual allowance can complicate the picture for high earners.
The employer's reporting duties
The employer reports the taxable elements of a termination payment through Real Time Information in the normal way, deducting income tax and National Insurance through PAYE on the earnings bucket and applying Class 1A on any excess above £30,000 [6]. Software that carries the HMRC Recognised badge submits the Full Payment Submission with the correct treatment for each element, which removes most of the manual risk from a leaver's final pay run [14]. For platforms that embed payroll into their own product, the HMRC-recognised payroll API applies the same termination logic through a single integration rather than a manual spreadsheet [3].
Work out the take-home on a redundancy package
Because the taxable excess above £30,000 is added to the year's other income, an employee can estimate the tax on it with the Moonworkers UK salary calculator, which applies the 2026-27 income tax bands to any gross figure to show what lands in the bank.
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About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method. It covers the vast majority of employees on standard tax codes, but it won't match your payslip to the penny in every case. Edge cases it does not cover include in-year tax code changes, K-code carry-forwards, Week 53 adjustments, payrolled benefits in kind, and multi-employment NI deferral. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. Your employer may apply adjustments not covered here, such as mid-year tax code changes, K-code carry-forwards, or benefits in kind processed through payroll. For most employees on a standard tax code these differences are negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
Whether redundancy pay is taxable depends less on the total figure than on how that figure is built. Genuine compensation for losing the job, including statutory and enhanced redundancy pay, is shielded by the £30,000 exemption and carries no employee National Insurance, while notice pay, holiday pay and unpaid wages are ordinary earnings taxed in full. The £30,000 line is a single allowance across the whole termination, and the employer absorbs a 15% Class 1A charge on anything above it.
The direction of travel is towards less room to reclassify earnings as tax-free compensation, a trend set in motion by the Post-Employment Notice Pay rules and reinforced by the alignment of the Class 1A rate with the main employer rate. For employers and the platforms that process their payroll, the reliable path is software that sorts each element into the right bucket automatically and reports it correctly the first time, leaving the leaver with an accurate final settlement and no surprise from HMRC months later.
Frequently asked questions
Is statutory redundancy pay always tax-free?
In practice, yes. Statutory redundancy pay is capped at £22,530 for a dismissal on or after 6 April 2026, which is below the £30,000 exemption threshold, so the statutory amount is received in full with no income tax or National Insurance deducted [2]. Tax only becomes an issue when an employer adds an enhanced or contractual redundancy payment that pushes the compensation total above £30,000 [1].
Do you pay National Insurance on redundancy pay?
An employee pays no National Insurance on a qualifying termination payment, even on the portion above £30,000 [3]. The employer, however, pays Class 1A National Insurance at 15% on any compensation above the £30,000 threshold [4]. Notice pay and holiday pay are different: they are ordinary earnings and carry full employee and employer National Insurance [9].
Why is my notice pay being taxed when my redundancy pay is not?
Notice pay, whether paid under a contractual clause or worked out through the Post-Employment Notice Pay rules, is treated as earnings the employee would have received had they worked their notice [9]. It is therefore taxed through PAYE with full National Insurance and does not use any of the £30,000 exemption, which is reserved for genuine compensation for loss of the job [3].
How much redundancy pay can you receive before paying tax?
The first £30,000 of qualifying redundancy compensation is free of income tax [1]. Anything above £30,000 is added to the individual's income for the tax year and taxed at their marginal rate, so a higher-rate taxpayer pays 40% on the excess [7]. Paying part of the excess into a pension can reduce the taxable amount for those who qualify [12].
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