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Made Redundant? Your Guide to the £30,000 Tax-Free Threshold and Smart Choices
If you have news that your role is being made redundant, your head is probably full of questions about money and tax. The phrase redundancy 30000 tax free threshold will be front of mind, and rightly so: you can receive up to £30,000 of genuine redundancy compensation free of income tax. I will walk you through what counts as genuine redundancy pay, how statutory redundancy is calculated from April 2026 with the weekly pay cap, why Payment In Lieu Of Notice or PILON is usually taxable via PAYE, and the practical steps you can take to protect as much of your package as possible. For a clear explanation of the £30,000 limit and what qualifies as a genuine redundancy lump sum, you can read the specific HMRC guidance on the £30,000 tax-free threshold.
What counts as genuinely tax-free under the £30,000 threshold
The headline is simple: you can receive up to £30,000 of genuine redundancy compensation tax-free. That includes statutory redundancy pay and any ex-gratia lump sums the employer pays in recognition of redundancy, provided the total is genuine compensation for loss of employment. Ex-gratia amounts that are structured purely as compensation for being made redundant will normally sit inside the £30,000 ceiling. If you spot figures like ‘ex-gratia’ on your settlement paperwork, check whether they are described as compensation for loss of employment; that language matters for the £30,000 tax-free threshold.
Not every payment in a redundancy package is treated the same. Payments in lieu of notice, or PILON, are taxed as earnings through PAYE and do not qualify for the £30,000 exemption in most cases. That means a lump sum labelled PILON will usually be taxed at your marginal rates, which could be 20%, 40% or 45% depending on your income, and National Insurance can also apply. For clarity on PILON classification and recent tribunal outcomes, review the HMRC brief on PILON and tax.
Voluntary redundancy and genuine ex-gratia payments can also fall inside the tax-free allowance when the employer can justify the payment as compensation for redundancy rather than salary in disguise. There are additional traps to watch for, for example where employers add bonuses, benefits or pensionable pay to the package without clear wording; those elements can be taxed. If your package includes multiple elements, sum the statutory and ex-gratia compensation to check whether you remain under the £30,000 threshold before assuming tax-free treatment.
The £30,000 is a lifetime cap per redundancy event, not per employer-careful structuring avoids tax pitfalls.
Frank Haskew, Tax Director at Smith & Williamson
Calculating statutory redundancy pay in 2026
Statutory redundancy pay is formula-driven; from April 2026 the weekly pay cap for statutory calculations is £700 and you count up to 20 years’ service. If you are aged 41 or over for a year of service it counts as 1.5 weeks’ pay for each full year, while younger age bands use smaller week multipliers. You must have at least two years’ continuous service to qualify, and employees over state pension age are not eligible for statutory redundancy pay. For a personalised total using the 2026 cap and your years of service, try the official statutory redundancy pay calculator.
Foreign work can boost your statutory entitlement where it counts as service. If you have at least one year of UK service, earlier periods of foreign service may be included in the statutory calculation, which can increase the weeks’ pay figure used for the formula. Bear in mind the statutory calculation will use the weekly pay cap of £700 when multiplying by the relevant weeks per year, so someone with 15 years’ service aged 45 could receive up to 15 times 1.5 weeks at the capped weekly rate, subject to the 20-year service limit.
Remember that statutory redundancy forms the backbone of most packages, but employers often add ex-gratia to reach an agreed exit figure. The statutory element is straightforward and predictable; anything above that becomes negotiable. If your statutory entitlement plus ex-gratia remains within the £30,000 tax-free threshold you avoid income tax on that portion, and that is why accurate statutory calculation is the vital first step in checking whether your total package will be tax-efficient.
Ask your employer to itemise statutory redundancy, ex-gratia, PILON and other payments in writing so you can see what sits inside the £30,000 tax-free threshold.
Pitfalls to avoid: PILON, holiday pay, bonuses and multiple redundancies
A frequent trap is assuming every sum in the package is tax-free. PILON is typically taxed through PAYE as earnings, so a lump labelled ‘payment in lieu of notice’ will usually attract income tax at your marginal rate plus National Insurance. Holiday pay ordinarily sits outside the tax-free redundancy calculation, but other elements such as discretionary bonuses, contractual benefits, and some termination payments can be taxable. Where your employer mixes these elements, the taxable portion can grow quickly and push you over the £30,000 threshold.
If you receive multiple redundancy payments from the same employer within a ten-year period, HMRC guidelines may limit how tax-free treatment is applied across those events; this can affect serial settlement arrangements. Also, employees who have reached the state pension age, currently 66 through 2026, are not eligible for statutory redundancy pay; employers still sometimes offer settlements but the statutory element will be missing, which changes the tax picture and negotiation leverage.
When you spot taxable items, ask for a clear breakdown on the settlement letter that separates statutory redundancy, ex-gratia compensation, PILON and any payments for notice, holiday or benefits. A clear schedule of payments enables you to check what sits inside the £30,000 tax-free threshold and what will be taxed via PAYE, and gives you the best platform to contest or re-structure the package before signing anything.
Smart structuring: ex-gratia payouts and pension sacrifice options
Ex-gratia payments are the employer’s discretionary top-up above statutory redundancy. When correctly documented as compensation for loss of employment, ex-gratia can count towards the £30,000 tax-free threshold; 40% of packages include ex-gratia elements, so this is a common route to boost net receipt. The key is that the employer must record the purpose clearly and avoid describing it as salary or notice. If you and your employer can agree wording that ties the payment to redundancy, you can legally shelter more of the package from income tax.
One advanced tool is using pension sacrifice or salary exchange to reduce taxable income. By asking your employer to make an agreed increased pension contribution at the point of exit, you can remove part of the package from earnings and place it into your pension where contributions receive tax relief. This can be particularly valuable if you face higher-rate tax on amounts over £30,000, but it requires employer agreement and adherence to HMRC rules; for practical considerations see guidance on pension sacrifice in redundancy contexts.
If you choose pension routing, confirm the amount is actually paid into the pension scheme before agreeing the settlement, and check the effect on your lifetime allowance protections. Pension benefits have their own tax ceilings and rules; missteps can trigger unexpected charges. Engaging a tax adviser to draft the settlement wording and confirm that any increased employer pension contributions meet HMRC expectations will reduce the risk of a later reclassification that could create a large tax bill.
Structuring ex-gratia payments
When negotiating ex-gratia, insist on a clear description that ties the payment to loss of employment, redundancy or compromise agreement settlement, not to unpaid salary. That clarity is your protection if HMRC queries the tax treatment later. If the employer is reluctant, propose a split: a defined statutory element plus a labelled ex-gratia lump sum that keeps the combined total under £30,000; remember, the £30,000 limit applies to the total genuine redundancy compensation per event, so careful arithmetic can preserve tax-free status.
How to approach pension sacrifice
If pension sacrifice is an option, request written confirmation from payroll that the employer will make the contribution directly to your pension scheme and that the contribution meets auto-enrolment and pension scheme rules. Confirm the timing too, because contributions made after termination may be harder to justify as salary exchange. Salary exchange can cut the taxable element of your settlement by up to your marginal rate, but you should also check any impact on state benefits and student loan repayments before proceeding.
Calculate your statutory entitlement using the £700 weekly cap for 2026 and count up to 20 years’ service to verify your baseline.
If your redundancy package exceeds £30,000: tax, reliefs and next steps
Any amount above £30,000 will usually be taxable as income at your marginal rates, which could be 20%, 40% or 45% depending on your total earnings, and some payments attract National Insurance. That means a £50,000 settlement with £30,000 tax-free exposes the remaining £20,000 to income tax, potentially leaving you with substantially less net cash. Before accepting, run the numbers on what you will actually take home and consider whether parts of the package can be restructured into ex-gratia or pension contributions to reduce the taxable portion.
If your employer has deducted tax at source and you believe an element should have been tax-free, you can explore reclaiming overpaid tax using HMRC processes. Where a redundancy payment over £30,000 includes a genuinely compensatory element that was taxed, completing form IR233 can allow you to claim partial tax relief; check the guidance and timing because these claims can be time-sensitive. For practical steps on relief and IR233, consult the MoneyHelper note on claiming relief on taxed redundancy payments.
Finally, if you face multiple redundancies from the same employer or complex historic service records, document everything and get professional advice. Repeated payments within ten years can attract special scrutiny and limits on tax-free treatment, and foreign service rules can alter your statutory calculation. Collect employer letters, payroll records and written settlement terms, because those papers are the evidence that protects your right to the £30,000 tax-free allowance and any subsequent relief claims.
Where possible and with employer agreement, routing part of the package into a pension via salary exchange can reduce taxable income and protect more value.
If tax has been applied incorrectly to genuine redundancy compensation above £30,000, explore an IR233 claim to recover overpaid tax.
How common redundancy payments are taxed
| Payment type | Typical tax treatment | Key limits or notes |
|---|---|---|
| Statutory redundancy pay | Tax-free up to £30,000 when combined with genuine ex-gratia | Calculated using up to 20 years’ service; weekly pay cap £700 for 2026 |
| Ex-gratia payment | Can be tax-free if genuinely compensatory | Must be clearly described; often used to keep total under £30,000 |
| PILON (Payment In Lieu Of Notice) | Taxed as earnings via PAYE | Does not qualify for the £30,000 exemption in most cases |
| Pension contributions (salary sacrifice) | Not taxed as salary if paid into pension correctly | Requires employer agreement and HMRC-compliant documentation |
| Holiday pay, bonuses, benefits | Typically taxable via PAYE | May push package over £30,000; check itemisation |
Frequently Asked Questions
Can my employer label a payment as ex-gratia to make it tax-free?
The label alone is not decisive. For an ex-gratia payment to qualify as tax-free redundancy compensation, it must be genuinely compensatory for loss of employment and documented as such. HMRC looks at substance over form, so employers should be prepared to justify the payment in writing. If a payment is simply a disguised salary or replaces notice pay, it is likely taxable. Insist on clear wording that ties the sum to redundancy and, if necessary, seek a tax or employment adviser to review the settlement before you sign.
How do I claim tax relief if I was taxed on redundancy that should have been tax-free?
If part of your redundancy bundle was genuinely compensatory but taxed, you can explore a claim for tax relief. The administrative route is to gather evidence: the settlement agreement, payslips, and a clear breakdown showing the compensatory element. Form IR233 can be used to claim relief where tax was overpaid on qualifying redundancy payments. Time limits and paperwork apply, so contact HMRC or a tax professional promptly to confirm eligibility and prepare the claim.
Should I accept pension sacrifice as part of a redundancy deal?
Pension sacrifice can be a powerful tax-efficient route to preserve value, because contributions paid into your pension are not treated as taxable salary. However, it needs employer agreement and must be implemented correctly so the payment counts as employer pension contribution at source. Consider the impact on your access to funds, any lifetime allowance issues, and whether you need cash immediately. If you are in a higher tax band, pension routing may save significant tax, but seek confirmation in writing and professional advice before proceeding.
Need help reviewing your redundancy package?
If you want a second pair of eyes on the maths and the tax wording, I can review your settlement letter and suggest practical changes to protect the tax-free portion. A short review often pays for itself.
Request a redundancy reviewSources
- HMRC Employment Income Manual EIM128000 – Detailed guidance on the £30,000 tax-free threshold and genuine redundancy payments
- GOV.UK statutory redundancy pay calculator – Official calculator and rates, including the £700 weekly cap for 2026
- HMRC Revenue and Customs Brief 8 – PILON – Guidance on how PILON is taxed following tribunal decisions
- RSM UK on tax and redundancy – Practical notes on pension sacrifice and tax planning in redundancy
- MoneyHelper guidance on redundancy and tax – Practical guidance on claiming relief and understanding taxable elements
Final Thoughts
Facing redundancy is never easy, but understanding the rules around the redundancy 30000 tax free threshold puts you back in control. With clear itemisation, accurate statutory calculations using the £700 weekly cap for 2026, and thoughtful negotiation around ex-gratia and pension routing, you can preserve more of your package. If your offer looks complicated, get the numbers in writing, run the homework on what is taxable, and ask for small wording changes that can save you thousands. You can turn a stressful moment into a strategic financial step.
