Understanding what you have been paid – the tax dividing line

The most important distinction when you receive a payment is not the label your employer uses, it is whether the money is genuine compensation for loss of employment or contractual earnings. Compensation for loss of employment, which includes statutory redundancy and enhanced or ex-gratia redundancy that relates to termination, can fall within the £30,000 exemption, correct for the 2026/27 tax year. Contractual earnings such as notice pay, holiday pay, bonuses and unpaid wages are always taxable as employment income, regardless of how they are described. A Payment in Lieu of Notice or PILON is always taxed as earnings; the Post-Employment Notice Pay rules apply and mean PILON cannot be sheltered inside the £30,000 exemption, see the HMRC explanation of the PENP rules here. For redundancies on or after 6 April 2026 the statutory weekly pay cap is £751 and the maximum statutory redundancy payment is £22,530, figures that are relevant for 2026/27. If your total qualifying termination payments from the same employment exceed £30,000 for 2026/27 the excess will be subject to Income Tax at your marginal rate; employee National Insurance is not payable on qualifying redundancy payments even on amounts above £30,000, though employers may face Class 1A NIC on the excess.

Emergency tax and how to reclaim it

Large, one-off payments often trigger emergency tax codes or produce an unexpectedly high deduction at source, especially if the payment arrives outside your regular payroll or at the start of a tax year. Employers sometimes apply PAYE in a way that looks as though your lump sum is a one-off yearlong salary, which can leave you overtaxed. The first step is to check the figures on any P45 or pay statement, and confirm whether the tax deducted matches the taxable element of the payment. If you think you have been overtaxed, Some people choose to to reclaim the excess using HMRC routes: if you are not working and need a refund you can use form P50, if you are not expecting to work again in the same tax year or you can reclaim through self-assessment if you submit a return; see details on reclaiming via HMRC here. Typical refunds arrive within about several weeks, though times vary; keeping clear records of the settlement agreement and pay statements will speed the process.

What could you do with the money?

Once the immediate tax picture is clear, you will have practical choices about what to do with redundancy money. The safest first move for many people is to secure a short-term cash buffer; holding three to six months of essential expenses in an easy-access account gives breathing space while you make longer-term decisions. Paying down high-cost debt is often attractive because clearing a 20% credit card interest rate is equivalent to a 20% guaranteed return, though debt advice is regulated; if debt is a concern it may be worth contacting free services such as MoneyHelper, StepChange or Citizens Advice. For amounts you do not need as a short-term buffer, you might consider tax-efficient savings: the annual ISA allowance lets you shelter up to £20,000 for the 2026/27 tax year, and sums above that can go into a General Investment Account, remembering that investing carries risk. From April 2027, the cash ISA allowance is set to drop to £12,000 for those under 65, while the overall £20,000 allowance and the Stocks and Shares ISA limit remain unchanged. A common approach is to to use part of the sum to reduce mortgage capital; reducing a mortgage at a 3% or 4% rate saves that interest compared with leaving the money in low-interest savings, though you must check for early repayment charges and consider whether an investment might reasonably expect a higher return. Throughout this section I link to further reading on saving and investing with a view to building a longer-term plan, including our savings and investments page here.

Emergency fund

Building an accessible emergency fund is a low-risk first step for what to do with redundancy money, particularly when redundancy brings income uncertainty. A practical target is three to six months of essential outgoings, for example if your monthly essentials total 1,500 then three months would be 4,500 and six months 9,000, correct for the 2026/27 tax year. Keep this money in an easy-access savings account or a notice account that allows withdrawals without market risk; the priority is liquidity and capital protection rather than headline interest. Having immediate cash available reduces the pressure to sell investments at a depressed price, and makes negotiating next steps from a position of choice rather than necessity.

Debt (signposting only)

If you have high-cost unsecured debt You might weigh up whether to to use redundancy money to clear it, because paying 15% to 30% APR on cards typically costs more than most safe investments earn. Debt advice is a regulated activity; I am signposting rather than advising. Free organisations offering help include MoneyHelper at their redundancy hub here, StepChange at stepchange.org, and Citizens Advice at citizensadvice.org.uk. If debt is severe it may be worth engaging with these services before making any one-off payments from your settlement.

Saving and investing

For amounts beyond an emergency fund and any urgent debt, investing can help your money work over the long term; the annual ISA allowance for 2026/27 is 20,000 which provides a tax-efficient wrapper for cash or stocks and shares. It can be worth considering to allocate some redundancy money into an ISA and some into a diversified portfolio outside the ISA if you exceed the allowance, including a General Investment Account. Remember that investing carries risk: value can fall as well as rise, you may get back less than you put in, and past performance is not a guide. If you prefer managed solutions, our portfolio management page outlines longer-term approaches to retirement and goals here. Fees, time horizon and your attitude to short-term volatility should drive how much you invest immediately versus holding cash.

Pension contribution and mortgage overpayment

Some people find it helpful to asking their employer to pay the taxable excess into a pension as an employer contribution, a route I examine in more detail below because it can be tax-efficient. Alternatively, adding a lump sum to your mortgage reduces outstanding capital and saves interest at the mortgage rate; for example, overpaying 25,000 on a 25-year mortgage at 3.5% saves interest that a cash account would struggle to beat. There is no universal right answer; check your mortgage lender’s early repayment charge rules and compare the guaranteed interest saving with expected investment returns. If you plan to use an overpayment to improve monthly cashflow, confirm how much flexibility your mortgage product allows for future access to capital.

Should you pay some into your pension?

Deciding whether to put redundancy money into a pension depends on timing, tax, and whether you want the capital accessible. There are two principal routes to consider for 2026/27. Another approach some people take is asking the employer to pay the taxable excess above the 30,000 exemption directly into a pension as an employer contribution; this can avoid Income Tax and employee NIC for you, it does not use up the 30,000 exemption, and the only substantive constraint is the pension annual allowance which is 60,000 for the 2026/27 tax year. The alternative is paying the money into a personal pension yourself; however personal contributions only attract tax relief up to 100% of relevant UK earnings, and redundancy and termination payments do not count as relevant earnings, so if you have no other earnings you may be unable to claim tax relief on a personal contribution. Additional detail for 2026/27 includes the Money Purchase Annual Allowance of 10,000 if you have already flexibly accessed a defined contribution pension, and the option to carry forward unused annual allowance from the prior three tax years. Remember pension warnings: capital is at risk, money is normally locked until age 55 and rising to 57 from 6 April 2028, and tax treatment depends on your circumstances and may change; see the official note on annual allowance here.

A few things worth considering for your wider situation

Beyond tax and immediate choices, there are broader consequences you may want to consider before deciding what to do with redundancy money. Means-tested benefits are sensitive to capital; Universal Credit applies a capital taper where savings between 6,000 and 16,000 reduce awards, and savings above 16,000 typically disqualify a claimant, correct for the 2026/27 tax year, so placing the cash into certain accounts or investments without checking benefit entitlement may have unintended consequences. A career break can create National Insurance gaps that affect the new State Pension; the full new State Pension normally requires 35 qualifying years and voluntary Class 3 contributions can fill gaps, costing around £957 for 2026/27 – check the current rate on GOV.UK before deciding, and verify your State Pension forecast first, as not every gap is worth filling. Settlement agreements are legally binding and UK law requires you to receive independent legal advice before signing; this legal advice is separate from financial advice and is sometimes paid for by the employer up to a capped amount. Where timing is flexible, it may be worth negotiating to split any taxable excess across two tax years to make use of two sets of personal allowances and rate bands, but this requires employer agreement and careful planning with a financial adviser or tax specialist. For tax and estate planning matters that interact with a large lump sum, you may find it useful to read more about compliance and taxes on our tax and estate planning page here.

Take your time – and where to get free help

When thinking about what to do after redundancy it is worth resisting pressure to make hurried decisions. The right move for some people may be to hold cash while they explore options, for others it will be to pay down debt or move money into long-term investments. Free, impartial guidance can help you prioritise: the MoneyHelper redundancy hub offers practical advice on redundancy, tax and benefits at their redundancy page here. If you are over 50 with defined contribution pension pots, Pension Wise provides government-backed guidance on pension options at here. If debt is a concern, StepChange provides free support at stepchange.org and Citizens Advice can help with employment rights and benefits at citizensadvice.org.uk. One route worth considering is to take a short period of reflection, confirm tax treatment and benefits exposure, and then speak to a financial adviser if the settlement is complex. Taking time to check your position reduces the chance of a costly mistake when redeploying redundancy money.

When speaking to a financial adviser makes sense

You may find it worth arranging professional advice if the package is large, tax and pension rules are complicated, or your personal circumstances are complex. Examples when financial advice can add value include when the settlement is above about 50,000, when the package contains multiple elements with different tax treatments, if the payment will push you into the higher-rate or additional-rate tax brackets for 2026/27, when you are considering an employer pension contribution route, or if you are close to or in retirement and need to integrate the lump sum with pension access decisions. A financial adviser can help model scenarios that include carry-forward of pension annual allowance, splitting taxable excess across tax years, and the interaction with benefit entitlements. For some people, a good starting point is a single initial consultation to map options and costs before committing to ongoing advice. If you decide to talk to a regulated financial planner at Humboldt Financial, you can arrange contact via our team pages; my profile is available at Jack Logan, Independent Financial Adviser.

About the author

Jack Logan is an Independent Financial Adviser at Humboldt Financial with a focus on retirement planning, pre-retirement strategies and working with individuals from sector-specific industries. If you would like tailored advice about what to do with redundancy money, how an employer pension contribution could work for you, or how to integrate a settlement payment into a wider financial plan, you can find Jacks professional profile and contact details at https://humboldtfinancial.co.uk/team/jack-logan/. Some people choose to a short advisory call to review the settlement agreement and the tax positions described in this guide before signing any documents.