Guide
Redundancy package tax: separate the award, notice, holiday and final wages
The tax treatment follows the components of your package, not the heading on the settlement letter. Get the written breakdown before trying to estimate the payment into your bank.
Quick answer
The first combined £30,000 of qualifying termination awards is usually exempt from Income Tax. Wages, holiday, bonus and taxable notice payments remain ordinary earnings even when the whole package is smaller. PENP can move some enhanced redundancy into taxable earnings; statutory redundancy is protected from that PENP allocation. Classify the lines before estimating deductions.
On this page
Start with an itemised package, not one total
A redundancy letter might contain statutory redundancy, contractual enhancement, payment in lieu of notice, unused holiday, final wages and a bonus. Those amounts do not all receive the same tax treatment. A payment being called “compensation”, “ex gratia” or “severance” does not by itself make it exempt.
Use this working table with your employer’s figures:
| Component | Ordinary treatment to check |
|---|---|
| Final wages, holiday, bonus or commission | PAYE and employee NI under the usual earnings rules |
| Notice pay/PILON and taxable PENP | Ordinary taxable earnings, with NI as applicable |
| Statutory redundancy | Part of the qualifying termination award; protected from PENP reallocation |
| Additional qualifying termination award after PENP | Shares the £30,000 exemption with statutory redundancy and other qualifying benefits |
| Qualifying award above £30,000 | Income Tax; normally employer Class 1A rather than employee NI |
The starting rules and examples are on GOV.UK’s termination-payment tax guide. The calculator classifies ordinary cash components; it does not decide whether an unusual settlement payment qualifies for a particular exemption.
A £25,000 package can still include taxable earnings
Suppose your written package is £10,000 statutory redundancy, £10,000 additional qualifying redundancy, £4,000 taxable notice pay and £1,000 holiday pay. Payroll confirms no further PENP allocation, and there are no other payments or benefits to combine.
Total gross cash is £25,000. The £20,000 qualifying award is within the shared exemption. The remaining £5,000 notice and holiday pay is ordinary taxable earnings, subject to normal PAYE and NI rules. It is wrong to treat all £25,000 as exempt simply because the total is below £30,000.
The Income Tax and employee NI actually deducted from that £5,000 depend on payroll periods, thresholds, code and other pay. The classification does not mean a fixed percentage will be deducted or that £20,000 plus a particular net wage amount is guaranteed.
PENP identifies notice earnings inside a severance award
Post-employment notice pay, or PENP, is a statutory calculation for notice earnings where you do not work all of the relevant notice. It can make some additional severance taxable as earnings even when the contract does not call it PILON. Statutory redundancy pay is excluded from this reallocation.
HMRC’s published example has £10,000 statutory redundancy plus £5,000 severance. Four unworked notice weeks at £500 give £2,000 of taxable notice earnings within the severance. That leaves £13,000 as the qualifying award: £10,000 statutory plus £3,000 remaining severance. The £2,000 is ordinary taxable earnings. If PENP exceeds the available additional award, only the available additional award is reclassified, not the protected statutory redundancy.
The actual PENP formula uses specified basic pay, pay-period and notice-period inputs and accounts for relevant notice payments already taxed. Request the employer’s calculation; do not use a casual “weeks × total pay” rule for every case. Our package checker accepts employer-confirmed PENP and avoids charging the same notice payment twice. See HMRC’s PENP formula guidance and the definition of relevant termination awards.
The £30,000 exemption is shared; the excess has a different NI treatment
Suppose a £10,000 statutory amount and £25,000 qualifying enhancement remain after any PENP, with no other award or benefit. The qualifying award is £35,000: £30,000 is within the exemption and £5,000 is subject to Income Tax. That £5,000 is not automatically subject to employee NI as wages would be. Employer Class 1A NI normally applies to the qualifying excess.
The threshold is not a fresh allowance for each instalment, each label or each tax year. Qualifying payments and relevant non-cash benefits must be combined, including amounts paid later and relevant payments from associated employment. Keeping a company car or other property can therefore affect the calculation.
Our ordinary cash checker asks you to confirm that there are no other amounts to combine. If there are, keep the checker’s arithmetic separate from a full tax assessment. See HMRC’s termination-payment threshold guidance and the current Class 1A rules.
Payment timing, the P45 and tax-code deductions affect the bank payment
Once the components are classified, payroll applies the appropriate deductions. A payment after the P45 can use a different tax-code basis from your last ordinary payslip. That can produce an overpayment or underpayment to reconcile with HMRC; it does not change whether a component is taxable in the first place.
Ask for the taxable amount, tax code and basis, NI-able amount, payment date, year-to-date figures and a separate payment statement. Check the payroll calculation before assuming a large deduction means the entire award was taxed incorrectly. The official deduction guidance explains the P45 position. Use the final-pay checklist for wages and holiday, and the payslip checker to organise an unexplained deduction.
Our tool does not calculate a final net redundancy package. That would require the actual payment periods, cumulative PAYE history, notice formula inputs, NI treatment and deductions, alongside any complex settlement circumstances.
Recognise cases that need more than the ordinary cash checker
Employer pension contributions, legal fees paid directly to your solicitor, injury or disability payments, foreign service, restrictive covenants and non-cash benefits can follow distinct conditions. Do not fold them into “extra redundancy” without checking the applicable rule. A salary sacrifice or pension arrangement can also raise annual-allowance questions.
A settlement agreement may resolve claims and impose obligations as well as pay redundancy. Get the required independent advice on the agreement and tax treatment where relevant. Keep entitlement and tax questions separate: the statutory redundancy calculation does not assess whether the overall settlement is fair or whether a claim should be waived.
A payroll request you can use before agreeing the figures
“Please itemise statutory redundancy, qualifying enhancement, wages, holiday, notice/PILON, bonus and non-cash benefits. Please provide the PENP calculation, show which notice sums have already been taxed, and identify all payments combined for the £30,000 exemption. Please confirm the Income Tax and employee/employer NI treatment separately, the payment dates and the code and basis used after any P45.”
Keep the written answer and calculation with the agreement. If the employer cannot yet confirm PENP, treat the award’s exemption split as unresolved. You can still check the known wages, holiday and notice components and prepare the remaining questions without inventing a net figure.
What to do next
- Ask for statutory redundancy, enhancement, wages, holiday, bonus and notice/PILON as separate amounts.
- Request employer-confirmed PENP, including an explicit £0 where appropriate; a package label is not enough.
- Combine qualifying payments and benefits for the same termination before using the shared £30,000 exemption.
- Check the statutory entitlement separately from the tax treatment of the whole package.
- Use the cash-package checker only for the supported ordinary components and confirmed PENP.
- Ask payroll for the actual payment dates, code, NI treatment and deductions before treating gross amounts as spendable cash.
Try the tool
Check your payslip or model a change.
Use the checker if you already have a payslip. Use the calculator if you want to model take-home pay or salary-sacrifice changes before payday.
About this guide
Written by Dan. Dan has spent 20 years working across payroll, HR, benefits and reward. IsMyPayRight is an independent personal project, not connected with any employer or with HMRC.
AI tools help with research and drafting. The official sources used are listed at the end of the guide.
This is general guidance, not a professional review of your circumstances. Read our editorial process and the corrections log.
Methodology and sources
See how the calculations work, which sources they use, how results are tested, and which payroll details the estimates cannot verify.
Common questions
- Is every redundancy package below £30,000 tax-free?
- No. Wages, holiday pay, bonus and taxable notice/PENP remain ordinary taxable earnings. The first combined £30,000 exemption applies to qualifying termination awards after their components have been classified.
- Can PENP reduce the exemption for statutory redundancy pay?
- Statutory redundancy pay is protected from PENP reallocation. PENP can make additional severance taxable as ordinary earnings, up to the available additional award. Ask payroll for the calculation and avoid counting notice pay twice.
- Do I pay employee NI on qualifying redundancy above £30,000?
- The qualifying award above the shared exemption is subject to Income Tax and normally employer Class 1A NI rather than employee NI. Wages, notice and other ordinary earnings still follow their usual employee NI rules.
Official sources
Use these references to check the rules behind this guide. Check the tax year and your circumstances before applying an example to your own pay.