Redundancy Severance Pay Details
📊 Redundancy Tax Breakdown
When receiving a redundancy settlement or ex-gratia severance package in the UK, understanding tax liabilities ensures you calculate your exact net take-home payout.
Under UK tax legislation, genuine redundancy payments receive favorable tax treatment compared to standard employment salary.
⚙️ HMRC Statutory Tax Rules on Redundancy Pay for 2026/27
1. The £30,000 Statutory Tax-Free Exemption
Under Section 401 ITEPA 2003, genuine statutory redundancy payments and ex-gratia severance settlements up to £30,000 are completely exempt from Income Tax and National Insurance.
2. Tax Liabilities on Amounts Over £30,000
- Income Tax: Any portion of a severance package exceeding £30,000 is subject to Income Tax at your marginal rate (20%, 40%, or 45%).
- National Insurance Exemption: Employee Class 1 National Insurance Contributions (NICs) are NOT deducted from redundancy payments, even on amounts exceeding £30,000.
3. Contractual Notice Pay (PILON) vs Redundancy Pay
It is crucial to distinguish between redundancy pay and notice pay:
- Redundancy Payout: Eligible for the £30,000 tax exemption.
- Pay in Lieu of Notice (PILON) & Accrued Holiday: Treated as standard contractual earnings and fully subject to PAYE Income Tax and Class 1 NI.
📊 Practical Severance Tax Worked Examples
Below are two worked calculation examples illustrating net payouts on redundancy packages:
- Total Severance Package: **£45,000.00**
- Tax-Free Threshold: **£30,000.00** (0% Tax / 0% NI)
- Taxable Excess: £45,000 - £30,000 = **£15,000.00**
Calculation: Taxable £15,000 × 20% Income Tax = £3,000.00. Employee NI = £0.00. Net Payout = £45,000 - £3,000 = £42,000.00.
- Total Severance Package: **£80,000.00**
- Tax-Free Threshold: **£30,000.00**
- Taxable Excess: £80,000 - £30,000 = **£50,000.00**
Calculation: Taxable £50,000 × 40% Income Tax = £20,000.00. Employee NI = £0.00. Net Payout = £80,000 - £20,000 = £60,000.00.
📑 Common Pitfalls & Tax Code Warnings
- Over-Deduction via Emergency PAYE Tax Codes: Employers often deduct tax from lump-sum redundancy payments using an emergency 0T month-1 tax code, causing temporary over-taxation. You can claim back overpaid tax directly from HMRC using form P50 or P53.
- Confusing PILON with Ex-Gratia Redundancy: If your settlement agreement bundles PILON (Pay in Lieu of Notice) into a lump sum, HMRC requires the PILON element to be separated and fully taxed.
- Employer National Insurance Surcharge: While employees pay 0% NI on severance over £30,000, employers must pay Employer Class 1A NICs (13.8%) on redundancy payments exceeding £30,000.
❓ Frequently Asked Questions (FAQ)
No. Employee Class 1 National Insurance Contributions (NICs) are never deducted from genuine redundancy payments, even for amounts that exceed the £30,000 tax-free limit.
If your employer used an emergency tax code and over-taxed your severance payout, you can submit form P50 (if you are not working) or form P53 to HMRC online to receive a fast tax refund.
Yes. If your redundancy payout exceeds £30,000, you can request your employer to make an employer pension contribution (salary sacrifice) with the taxable excess, avoiding Income Tax entirely.
Retaining company property (such as a company car or laptop) as part of a redundancy package is assigned a monetary cash value by HMRC and counted toward your £30,000 tax-free allowance.