Redundancy Pay Tax Calculator UK: How Much Tax Will You Pay in 2025?

The first £30,000 of a genuine redundancy payment is tax-free in the UK, but anything above that threshold is taxed as employment income through PAYE. National Insurance does not apply to redundancy payments, which is one of the few reliefs available when you lose your job. A worker receiving £45,000 in total redundancy pay would pay no tax on the first £30,000 and income tax on the remaining £15,000 at their marginal rate.

This guide explains exactly how redundancy pay tax works for 2025/26, how to use a redundancy pay calculator to estimate your net figure, and what to watch for when your employer processes the payment. Use our redundancy pay calculator to model your statutory entitlement and tax position before the money lands in your account.

The £30,000 tax-free threshold explained

UK tax law treats the first £30,000 of a qualifying redundancy payment as exempt from income tax. This is a lifetime allowance per redundancy event, not an annual one. If you are made redundant and receive £28,000, the entire amount is tax-free. If you receive £38,000, only £8,000 is taxable.

The threshold applies to the total qualifying redundancy payment, which can include both statutory redundancy pay and any enhanced or ex-gratia payment your employer offers, provided the payment is genuinely connected to the redundancy. Payments that are relabelled salary, bonuses or other routine earnings do not qualify for the exemption, even if your employer describes them as redundancy pay on your payslip.

For a full breakdown of how statutory redundancy pay itself is calculated, see our guide on how UK redundancy pay works and our article on how redundancy entitlement is calculated.

National Insurance on redundancy pay

Genuine redundancy payments are exempt from both employee and employer National Insurance contributions. This is a significant saving compared with receiving the same amount as salary. On £15,000 of taxable redundancy pay above the threshold, you avoid employee NI of 8% (on earnings in the standard band) or 2% (on earnings above the upper earnings limit), depending on your total income for the year.

The NI exemption applies to the full redundancy payment, including the portion above £30,000 that is subject to income tax. Employers also pay no employer NI on qualifying redundancy payments. If your payslip shows NI deductions on a redundancy payment, query it with your payroll department immediately, as this is likely an error.

Be aware that other termination payments, such as accrued but untaken holiday pay, are not redundancy payments and are subject to both income tax and National Insurance in the normal way. Holiday pay is always fully taxable regardless of the £30,000 threshold.

How PAYE works on redundancy payments

Your employer deducts income tax from any redundancy payment above £30,000 through the PAYE system at the time of payment. The tax is calculated based on your tax code and total taxable pay received in that pay period. Because redundancy is often paid as a lump sum in a single month, the PAYE system can over-tax you if it treats the payment as if you earn that amount every month for the rest of the year.

This is a common source of confusion. If you receive a £50,000 redundancy payment in March, PAYE may apply an emergency or cumulative calculation that assumes a very high annual income, resulting in more tax deducted than you actually owe. You can reclaim the overpayment through your self-assessment tax return or by contacting HMRC after the tax year ends.

Tax codes and redundancy

Your tax code determines how much tax-free personal allowance is applied before tax is deducted. If you have a standard 1257L code for 2025/26, you receive the full personal allowance of £12,570 across the year. When a large redundancy payment is processed, the PAYE system may not apply your remaining personal allowance optimally in that single pay period, particularly if you have already used most of your allowance earlier in the tax year.

If you are made redundant partway through the tax year and have not earned much before the redundancy, you may have significant unused personal allowance. In some cases, structuring the payment across two tax years (if your employer agrees to delay part of the payment until after 6 April) can reduce the overall tax bill, though this requires careful planning and is not always possible.

Statutory vs enhanced redundancy: tax treatment

Statutory redundancy pay and enhanced redundancy pay are treated identically for tax purposes. Both count toward the £30,000 tax-free threshold. There is no separate allowance for statutory pay versus voluntary enhanced pay. If your employer offers six months' salary as an enhanced package on top of your statutory entitlement, the entire combined figure is assessed against the single £30,000 limit.

Many larger employers offer enhanced redundancy schemes that exceed the statutory minimum, particularly for long-serving staff. A 15-year employee on £45,000 might receive statutory pay of around £12,000 plus an enhanced payment of £25,000, giving a total of £37,000. In this case, £30,000 is tax-free and £7,000 is taxable at their marginal rate, typically 20% or 40% depending on their other income for the year.

What is not covered by the tax exemption

Several common termination payments fall outside the redundancy tax exemption and are fully taxable. These include outstanding salary and wages up to your termination date, accrued holiday pay, bonuses earned but not yet paid, payments in lieu of notice where your contract does not permit PILON, and company car or benefit cash equivalents not connected to redundancy.

Payments for restrictive covenants, such as agreeing not to work for a competitor for a set period, are taxed as employment income without any £30,000 relief. If your settlement agreement bundles multiple elements together, ask for a breakdown showing how much is allocated to each component. The allocation affects your tax position, and HMRC can challenge arrangements that appear designed primarily to avoid tax.

Using a redundancy calculator for tax estimates

A redundancy pay calculator helps you in two stages. First, it calculates your statutory entitlement based on your age, years of service and weekly pay (capped at £643 per week for 2025/26). Second, you can apply the tax rules to estimate your net receipt after income tax on any amount above £30,000.

To use the calculator effectively, gather your gross weekly pay (or an average if your hours vary), your date of birth, your employment start date, and any enhanced payment your employer has offered. The calculator will show your statutory figure, your total expected payment, the tax-free portion, and the estimated tax due on the remainder.

Remember that the calculator provides estimates. Your actual tax deduction depends on your total income for the tax year, your tax code, and how your employer processes the payment through payroll. If you have other income sources, such as rental income or self-employment profits, your marginal tax rate on the taxable portion of redundancy pay may be higher than the calculator assumes.

Worked example 1: statutory pay only

Sarah is 38 years old and has worked for her employer for 8 years. She earns £650 per week. Her statutory redundancy pay is calculated as 8 years multiplied by 1 week's pay per year (she is aged 22 to 40), giving 8 weeks. Her weekly pay is capped at £643, so her statutory redundancy pay is £5,144.

Sarah receives no enhanced payment. Her total redundancy pay of £5,144 is well below the £30,000 threshold. She pays no income tax and no National Insurance on the payment. She receives the full £5,144 net. Her employer should process this as a tax-free termination payment on the payroll system.

Worked example 2: enhanced package above the threshold

James is 52 and has 18 years of service. He earns £900 per week. His statutory redundancy pay is 18 years at 1.5 weeks' pay per year (he is over 41), giving 27 weeks. At the £643 weekly cap, his statutory pay is £17,361. His employer offers an enhanced payment of £20,000, bringing his total to £37,361.

The first £30,000 is tax-free. The remaining £7,361 is taxable. James's other income for the tax year is £38,000 from employment before redundancy, so his total income including the taxable redundancy portion is £45,361. He is a basic-rate taxpayer, so the £7,361 is taxed at 20%, giving a tax bill of approximately £1,472 on the redundancy portion. No NI applies. James receives approximately £35,889 net from his redundancy payment.

Settlement agreements and tax planning

Many redundancies are finalised through a settlement agreement. This document sets out the payment terms and confirms that you waive your right to bring employment tribunal claims. The agreement should itemise each payment component and state the tax treatment of each element.

Before signing, check that the allocation between redundancy pay, holiday pay, notice pay and other elements is accurate. If your employer allocates too much to taxable categories and too little to the tax-free redundancy portion, you could pay more tax than necessary. An employment solicitor can review the agreement and flag any issues.

Claiming back overpaid tax

If PAYE deducts more tax than you owe on your redundancy payment, you have several options to reclaim it. If you are not required to file a self-assessment return, you can use HMRC's online form P50 after your employment ends to claim a refund for the current tax year. If the tax year has ended, you can claim through HMRC's repayment service or by filing a self-assessment return.

Keep your P45 and P60 documents, along with any payslips showing the redundancy payment. These are essential for any reclaim. If your employer used an incorrect tax code or processed the payment as regular salary rather than a termination payment, the error may be straightforward to correct with HMRC.

Common mistakes to avoid

Do not assume all money received on leaving a job is tax-free redundancy pay. Holiday pay, final salary and bonuses are always taxable. Do not accept a settlement agreement without understanding the tax breakdown of each payment element. Do not ignore a P45 error, as it affects your tax position for the rest of the tax year and potentially the next.

If you find new employment quickly after redundancy, your new employer will use the tax code from your P45. If too much tax was deducted on your redundancy payment, your new employer's payroll may automatically adjust through the cumulative PAYE system, effectively refunding the overpayment through higher net pay in subsequent months.

Run your own numbers

Understanding the tax rules before you receive your redundancy payment puts you in a stronger position to check your payslip, negotiate your settlement agreement, and plan what to do with the money afterward. The combination of a £30,000 tax-free allowance and no National Insurance makes redundancy pay more tax-efficient than equivalent salary, but only the qualifying portion benefits from these reliefs.

Use the redundancy pay calculator to estimate your statutory entitlement, apply the tax-free threshold, and see how much you are likely to receive after tax. For the underlying calculation rules, our guides on how UK redundancy pay works and redundancy entitlement cover the full statutory formula in detail.