Key Takeaways
- You do not automatically pay 40% tax on redundancy; only the amount above the £30,000 tax-free threshold can be taxed at your marginal rate (20%, 40%, or 45%).
- The first £30,000 of genuine redundancy pay, including most ex gratia sums, is tax-free in the UK for employees.
- Redundancy pay above £30,000 may be taxed at 20%, 40%, or 45% depending on your total income for the tax year.
- Statutory redundancy pay counts towards the £30,000 tax-free allowance, but other payments like PILON or holiday pay are fully taxable and do not benefit from this exemption.
- Large redundancy settlements can push you into a higher-rate tax band, so some or all of your payment above £30,000 may be taxed at 40%.
- National Insurance is not due on genuine redundancy payments but is due on payments like PILON and holiday pay.
- Our solicitors ensure your redundancy settlement uses all tax exemptions properly and that tax wording protects your position.
- Our legal fees are usually paid by your employer, meaning our expert settlement agreement advice is free for employees.
Do you pay 40% tax on redundancy?
If you are facing redundancy and ask, “Do you pay 40% tax on redundancy?” the answer is: not automatically. In England and Wales, the first £30,000 of genuine redundancy pay is tax-free, but any amount above this is taxed as income at your usual rate—which could be 20%, 40%, or, for very high earners, 45%—depending on your total annual income.
Settlement agreements are not legally binding unless you receive independent legal advice. This is a legal requirement and your employer almost always covers the solicitor’s fee. Our solicitors will review your agreement, explain which payments are tax-free, identify if any part is at risk of 40% tax, and ensure the tax wording is correct to maximise your net payout.
This guide explains exactly when higher-rate (40%) tax applies to redundancy, how different elements of your settlement are treated, and what steps you should take for the best tax outcome. For expert advice at no cost to you, speak to our solicitors on 0800 054 1144 or book your settlement agreement advice online.
The difference between tax-free and taxable sums in redundancy can mean thousands in your pocket. Always get a solicitor to review your settlement agreement wording before you sign.
Do you pay 40% tax on redundancy in the UK?
You do not pay 40% tax on redundancy by default in the UK. Redundancy payments are tax-free up to £30,000. Only payments above £30,000 may be taxed, and this depends on your total taxable income for the year. The excess over £30,000 is taxed at your marginal rate—20%, 40%, or 45%. Whether you pay 40% depends on your total income, including salary and all taxable elements in your package.
Misunderstandings arise when people believe all redundancy pay above £30,000 is automatically taxed at 40%. In reality, higher-rate tax applies only if your total annual income crosses the higher-rate threshold (currently £50,270 for the 2024/25 tax year). Your employer should apply PAYE to any sums above £30,000 and provide a detailed settlement agreement.
Sam receives a £42,000 redundancy package. The first £30,000 is tax-free. Sam’s taxable £12,000 excess, combined with their other income, takes them into the 40% tax band. Only this £12,000 is taxed at 40%, not the entire redundancy sum.
For a fast, accurate tax assessment and to review your settlement wording, contact our solicitors on 0800 054 1144 or book online for same-day advice.
Redundancy pay: What counts towards the £30,000 tax-free threshold?
The £30,000 exemption covers genuine redundancy pay and certain other termination payments not due under your employment contract. This includes:
- Statutory redundancy pay
- Enhanced redundancy pay (over and above the statutory minimum)
- Ex gratia payments (genuine compensation for loss of employment, not contractual entitlement)
Contractual payments such as pay in lieu of notice (PILON), accrued holiday, and bonuses do not count towards the exemption and are always fully taxable and liable for National Insurance. If you have received earlier tax-free termination payments since 6 April 2018, these reduce your remaining exemption.
Some employers misclassify ex gratia or enhanced redundancy payments as fully taxable items, costing you money. Our solicitors can challenge misclassification and protect your £30,000 exemption.
To check if you are receiving all the tax-free redundancy you are entitled to, consider using our Settlement Agreement Calculator for an estimate.
When does higher-rate (40%) tax apply to redundancy and termination payments?
Higher-rate tax (40%) applies only when your income for the year, including any taxable redundancy amounts above £30,000, exceeds the higher-rate threshold. For 2024/25, this threshold is £50,270. Any portion of your redundancy package above £30,000, once added to your other income (including PILON and bonuses), is taxed at the rate matching your total annual earnings. If your normal salary already puts you in the higher-rate band, any excess is taxed at 40%.
Jasmin earns £40,000 and receives a £35,000 redundancy payment. Of the redundancy sum, the first £30,000 is tax-free and £5,000 is added to her salary for tax purposes. Jasmin’s taxable income is £45,000, which is under the higher-rate threshold, so the £5,000 is taxed at 20%. If Jasmin’s income was above £50,270, her redundancy excess would be taxed at 40%.
For clarity on your personal circumstances, our Redundancy Calculator can help you plan your finances.
Always check how your redundancy and other pay will add up in the tax year. An incorrectly treated settlement can result in a surprise at year-end or even spark a tax investigation.
Statutory redundancy, enhanced redundancy, PILON, and other payments: What’s taxable and what isn’t?
Here’s how the most common elements of redundancy settlements are treated for tax and National Insurance:
| Payment Type | Tax-Free (up to £30k)? | Taxed as Earnings? | National Insurance Due? |
|---|---|---|---|
| Statutory redundancy pay | Yes | No | No |
| Enhanced redundancy pay | Yes | No | No |
| Ex gratia payment | Yes (up to £30k) | No | No |
| PILON (notice pay) | No | Yes | Yes |
| Untaken holiday pay | No | Yes | Yes |
| Contractual bonus/commission | No | Yes | Yes |
Statutory and genuine ex gratia redundancy payments, including enhanced redundancy, count for the £30,000 limit. All contractual sums (PILON, holiday pay, commission) are taxable and attract National Insurance.
If a payment above your notice period is described as “ex gratia” but your contract says it’s due, HMRC may treat it as taxable. Our Settlement Agreement Advice service confirms classification so you do not pay unnecessary tax.
For specialist advice about the tax treatment of unusual or mixed payments, speak to our solicitors or see more information in HMRC’s termination payments guidance.
Is independent legal advice (ILA) mandatory for redundancy settlement agreements?
Yes, for a settlement agreement to be legally binding under section 203 of the Employment Rights Act 1996, you must get independent legal advice (ILA). This involves a qualified solicitor advising you on the terms and effect of the agreement—including how tax applies to your payments. Most employers pay your legal costs for this service, making it free for you.
Without ILA, your settlement agreement offers no protection to the employer and you retain tribunal rights, even after signing. ILA ensures you understand exactly what you are giving up and how much you will keep of your settlement after tax.
Oliver was offered a standard redundancy settlement. Our ILA process uncovered that his notice pay was incorrectly marked as tax-free. We negotiated a correction so Oliver avoided later HMRC penalties and got the right net sum.
Book your ILA and settlement agreement advice online or call 0800 054 1144 to arrange your free appointment.
Tax on redundancy pay over £30,000: How is it calculated?
The amount of redundancy pay above £30,000 is taxed at the rate your income justifies for the year:
- Add up your statutory, enhanced, and ex gratia redundancy payments.
- The first £30,000 is completely tax-free—even if spread over different types.
- Add up all other taxable sums (payments over £30,000, PILON, holiday pay, bonus, etc.).
- The total of these and your regular salary determines the tax rate used (20%, 40%, or 45%).
- Tax and, where relevant, National Insurance are deducted via PAYE.
Only contractual payments attract National Insurance and only redundancy pay above £30,000 is taxed.
Ask for a written, itemised breakdown of all payments in your offer. Our Redundancy Calculator quickly shows your likely take-home.
See gov.uk’s guidance on redundancy pay and tax for more details.
Can tax in the settlement agreement wording affect your redundancy payout?
Absolutely. The way your settlement agreement defines and labels each payment directly affects how HMRC and your employer apply tax and National Insurance. Poorly drafted clauses, vague references to “ex gratia”, or the wrong wording about PILON can result in PAYE being applied to sums that should be tax-free, or vice versa.
Clauses often include tax indemnities, stating what happens if HMRC challenges the tax treatment later. Our solicitors routinely renegotiate ambiguous or risky wording to maximise your tax-free sum, protect you from future liability, and ensure you keep what you’re entitled to.
Natasha’s employer described an £8,000 sum as “ex gratia”, but the agreement wording risked it being classed as taxable PILON. Our solicitor renegotiated the clause, preserving Natasha’s exemption and increasing her net settlement.
If you want to secure the best outcome and be confident of your position, call our settlement agreement solicitors on 0800 054 1144 or book online for same-day advice. Your employer pays our fees, so advice to you is free.
Key clauses and risks in redundancy settlement agreements
Settlement agreements often contain clauses with lasting impact on your income or prospects:
- Restrictive covenants: May stop you from working with competitors or soliciting clients for a set period.
- References: The agreement may specify the type or content of references future employers can receive.
- Confidentiality: Can limit what you are able to say about the agreement and your employer.
- Tax indemnity: Might require you to reimburse your employer if HMRC seeks additional tax on your settlement, so careful wording is essential.
- Payment timing: Specifies when your payout is made after signing.
If any part of your settlement is unclear or seems unnecessary, get legal advice. Agreements can often be negotiated or clarified for your benefit.
Never accept a tax indemnity clause or restrictive covenant without an expert review. Our solicitors can negotiate fair terms and help you avoid unexpected restrictions or future risks.
You can find a detailed guide to these issues and how we help protect your position on our Settlement Agreement Advice and Client Success Stories pages.
Step-by-step process: How to sign your settlement agreement and receive your payout
Here’s how the process works:
- Receive your settlement agreement and redundancy figures from your employer.
- Consult a qualified solicitor—this should be funded by your employer.
- Meet remotely or in person with our solicitors, who review all terms and tax treatments.
- Our solicitor advises you on any negotiation required and reports changes to the employer if needed.
- Once finalised, you both sign the agreement and our solicitor provides your independent legal advice certificate.
- Return the agreement to your employer, who then processes your payment—usually within 7–14 days.
- Check your payslip or bank deposit for correct sums and tax deductions.
Priya believed part of her enhanced redundancy was fully taxable. Our review and negotiation allowed her to receive a larger tax-free payment, resulting in a better outcome and a faster, trouble-free payout.
For smooth, same-day legal support, call us on 0800 054 1144 or book your settlement agreement advice online. Your employer pays for the advice—there’s no charge to you.
Why choose Settlement Agreement Lawyers?
Our SRA-regulated solicitors specialise in redundancy and settlement agreements for employees only. When you instruct our team, you benefit from expert review of your tax situation, specialist negotiation of the agreement wording, and absolutely no charge to you—the employer pays the legal fees.
We offer rapid, remote appointments with same-day independent legal advice and settlement signing. Our expertise regularly helps employees increase tax-free payouts, negotiate better overall terms, and spot errors or missed entitlements.
See client success stories for examples of real employee outcomes. If you are affected by redundancy, unfair dismissal, workplace grievance, or discrimination, our team can help today.
Don’t risk missing out on your tax-free entitlement or signing a settlement agreement with risky wording. Our advice is fast, comprehensive, and free to you—the employer pays all legal costs.
Frequently Asked Questions About Redundancy Tax in the UK
Is redundancy pay always tax-free up to £30,000?
Yes, redundancy payments are tax-free up to £30,000, provided they meet the legal definition of genuine compensation for loss of employment. Any previous tax-free termination payments from the same employer since 2018 may use part of your exemption.
Will my redundancy payment push me into the 40% tax band?
Potentially, yes. If your salary, other taxable payments, and redundancy sum above £30,000 bring your total yearly income above £50,270 for 2024/25, the surplus is charged at 40%. Only the excess is taxed at this rate, not the full payment.
How is tax calculated on redundancy pay over £30,000?
Tax is applied to amounts above £30,000 based on your total income for the tax year. For most people, sums over this threshold are added to salary and other income and are taxed via PAYE at 20%, 40%, or, if applicable, 45%.
Are holiday pay and notice pay tax-free like redundancy?
No. Holiday pay and PILON are always treated as normal earnings, fully subject to income tax and National Insurance—these do not benefit from the £30,000 tax exemption.
Can I reclaim tax if too much is deducted from my redundancy payment?
Yes. If your employer deducts too much tax, or if you become a lower earner later in the tax year, you can reclaim overpaid tax via HMRC. Keep your P45 and settlement letters for your tax return or queries.
What happens if my employer misclassifies redundancy payments in my agreement?
Incorrect classification can lead to overpaid tax or even HMRC challenges later. A solicitor can spot and renegotiate errors, ensuring the correct tax is paid and that you are protected from future claims or audits.
Do I pay National Insurance on redundancy pay?
You never pay National Insurance on any redundancy pay, including both the tax-free amount and the taxable element above £30,000. National Insurance is only due on PILON, holiday pay, and contractual earnings.
Can I negotiate the division of payments in my settlement agreement?
Yes, within HMRC rules. A solicitor may identify opportunities to structure payments for greater tax efficiency, including increasing ex gratia or enhanced redundancy pay when justified. Negotiation is possible on amounts and classification before signing.
Understanding whether you pay 40% tax on redundancy is crucial to protect your payout. Only redundancy sums above £30,000 risk higher-rate tax, and the structure and wording of your settlement are key to your net benefit. Our solicitors specialise in employee settlement agreements, provide same-day, SRA-regulated advice, and our fees are covered by your employer—there is no cost to you.
Call Settlement Agreement Lawyers on 0800 054 1144 or book your settlement agreement advice online for a same-day appointment and peace of mind.
