Is redundancy pay taxable? A guide for UK employers

Redundancy happens. Sometimes the work is no longer needed. And sometimes roles just don’t make sense anymore. When that happens, you might need to let someone go. And in some cases, that means a redundancy payment.

Now here’s the bit that trips employers up: is redundancy payment taxable? The answer’s yes and no. Some of it is tax free. Some of it isn’t. And His Majesty's Revenue and Customs (HMRC) doesn't take lightly to businesses getting this wrong.

In this article, we explain what redundancy pay is, what gets taxed and what doesn’t. We also share tips on how to run it all through payroll without making a dog's dinner out of it.

The information in this article is current as of April 2025. Tax rules change, though. So, if you’re reading this later on, check the latest details on the official HMRC site.

What is redundancy pay?

Redundancy pay is money you give an employee when their job no longer exists. It’s not a bonus, and it’s not for quitting. It’s for when you make the role redundant. This would usually be because the business is changing, downsizing, or closing a department. But not all redundancy pay is the same. Here are some of the different types:

Statutory redundancy payment

This is the legal minimum you have to pay when someone qualifies. To qualify, they need to:

• be an employee (not a contractor),
• have worked for you for at least 2 years, and
• be made redundant (not fired or something else).

How much redundancy you owe depends on their age, how long they’ve worked for you (currently capped at 20 years), and their weekly pay (currently capped at £719 a week).

Contractual redundancy pay

This is anything extra redundancy pay above the legal minimum that you’ve agreed to in writing. It might be in the employment contract, a company handbook, or a formal redundancy policy. If you’ve promised it, you’ve got to pay it, even if it’s more generous than the statutory redundancy payment.

Non-statutory (or enhanced) redundancy pay

This is extra money you offer voluntarily. It’s not in any contract or official policy. You’re choosing to offer it, maybe as a goodwill gesture or to help smooth the process.

Once you offer it, though, it’s still a commitment. So, make sure you're prepared to follow through.

Redundancy vs statutory notice

Don’t mix up redundancy pay with notice pay. They’re separate. An employee still has a right to their statutory notice period (or whatever’s in their contract). If you don’t want them to work through it, you’ll need to give them a payment in lieu of notice (PILON). More on that later.

Quick recap

• Redundancy payment = general term for money paid when someone’s made redundant.
• Statutory redundancy payment = the legal minimum you must pay by law (if they qualify).
• Contractual redundancy pay = extra money you’ve agreed to in the employment contract or a formal policy.
• Non-statutory (or enhanced) redundancy pay = extra money you choose to offer that’s not in the contract.

Is redundancy pay taxable in the UK?

This is the bit most employers worry about. And fair enough, because HMRC doesn’t muck about when it comes to tax.

The first £30,000 of a redundancy payment is tax free.

That applies to the total amount you pay someone because their job's been made redundant. Doesn’t matter if it’s statutory, contractual, or a one-off gesture. If the whole thing adds up to £30,000 or less, you don’t need to deduct income tax or National Insurance (NI).

But if you go over that £30,000 mark? The rest gets taxed like normal wages.

Here's how it works

Let’s say you make an employee redundant and agree to pay them £40,000.

• The first £30,000 is tax free.
• The remaining £10,000 is classed as taxable income.
• You’ll need to deduct income tax through Pay As You Earn (PAYE) on that £10,000.
• You rarely need to deduct employee NI on redundancy pay. But it might apply depending on how you structure the redundancy payment.

Important: not all payments are treated the same

This £30,000 tax-free rule only applies to genuine redundancy payments. A genuine redundancy happens when an employee’s job is no longer needed. Not because of anything they did, but because the business changes. It could be due to restructuring, technology replacing roles, downsizing, or the business closing. 

Some other termination payments are always taxable. For instance, payments in lieu of notice, bonuses, or holiday pay.

Bottom line? If the payment is for redundancy, the first £30K is usually safe. Anything else? Don’t assume. Check it properly. Or better yet, set things up in such a way that payroll automatically handles it for you.

Redundancy pay and payroll: What employers need to do

Even if you’ve worked out how much to pay, you still need to run it through payroll the right way. And yes, even if it’s tax free. HMRC still wants to know about it. Here’s what you’ll need to do when processing redundancy payments:

Reporting redundancy pay to HMRC

All redundancy payments need to be reported through payroll. You’ve got to show it on your RTI (Real Time Information) submission, so HMRC knows what you have paid the employee.

You’ll also need to include the redundancy payment on their P45. It should show up separately from their final wages. Most payroll software has a specific box for it, so it’s clear what’s redundancy pay and what’s normal pay.

Tax on payments in lieu of notice (PILON)

Don’t want someone to work their statutory notice period? You've still got to pay them for that time. That’s a PILON. And it’s always taxable. Essentially, you need to treat it like normal pay. That means deducting income tax and National Insurance through PAYE.

Even if their redundancy payment is tax free, the PILON part definitely isn’t. Keep the two amounts separate in payroll, so it’s clear what’s what.

Other taxable termination payments

There are other payments that may get bundled in with a final pay packet that always count as taxable income, too. These include:

• Pro-rated holiday pay (for days they didn’t take)
• Outstanding wages
• Any bonuses or commissions still owed

All the above need to go through PAYE like normal earnings. It’s tempting to lump everything together as a 'final payment'. But that’s where mistakes happen. Break it down clearly. That way, the tax gets calculated properly and you’ve got a clear record if HMRC ever asks.

Tips to stay compliant and avoid penalties

When it comes to redundancy pay, it’s easy to make small mistakes that can turn into big problems. A missing figure here or a wrongly taxed payment there can land you in hot water with HMRC. These tips can help you keep everything clean, above board, and well-documented:

Keep detailed records of all termination payments

This one’s simple: write everything down and keep a copy. That includes how you worked out the redundancy pay, what type of payment it was (statutory, contractual, or extra), and when you paid it.

You’ll also want to keep payslips, P45s, and RTI submissions handy. If HMRC ever audits you, or the employee questions what you paid them, you’ll need to show your working. Don’t rely on memory, emails, or loose notes. Keep it tidy from day one!

Seek guidance if redundancy packages are complex

Offering more than statutory redundancy pay? Bundling in things like bonuses or PILON? Get advice. Some payments affect national insurance contributions, others don’t. And, as mentioned, the rules can change depending on how you structure the package.

The last thing you want is to guess your way through it and end up owing backdated tax or NI. A quick check with a payroll expert, employment lawyer, or HR advisor can save you a heap of admin (and stress) later. When in doubt, ask.

Use payroll software to apply tax rules automatically

Modern payroll tools can take care of most of the heavy lifting when it comes to tax considerations. You just plug in the right payment type. Then the software works out what’s tax free, what counts as gross pay, and what you need to deduct tax on.

It takes a lot of the guesswork out of the process and helps you stay on the right side of the rules. If you're still using spreadsheets or manual forms, this is your sign to upgrade.

Manage redundancy payroll with confidence

Sorting out redundancy pay is one thing. Getting it right in payroll is another. The good news is that Rippling can help.

Rippling’s payroll software automatically applies the £30,000 tax-free limit on redundancy payments, so you don’t have to worry about miscalculations. It knows what counts as taxable and what doesn’t. And it applies the right rules... without you needing to second-guess anything.

Because it’s part of Rippling’s all-in-one platform, everything talks to each other. Your HR, payroll, IT, and even spend management are all connected in one place. That means no dodgy spreadsheets, no data double-ups, and no faffing about with disconnected systems.

You get a single source of truth across your team, your tools, and your money. So when it comes to redundancy pay, you can handle it properly. And without the risk, without the guesswork, and without needing a full-blown finance team.

Redundancy pay FAQs

What is the basic redundancy pay in the UK?

If someone’s been working for you for at least 2 years, they typically have a right to statutory redundancy pay. The amount depends on their age and how long they’ve worked for you (currently capped at 20 years). It also depends on their weekly pay.

Here’s how it works:

• half a week’s pay for each full year that the employee was under 22 years old
• 1 week’s pay for each full year that the employee was aged 22 to 40
• 1 and a half weeks’ pay for each full year that the employee was 41 or older

There’s also a cap on how much weekly pay you can use in the calculation (as of April 2025, that cap is £719). So even if someone earns more than that, you’ll need to use the capped amount.

You need to pay the redundancy amount in full. The government only gets involved if the business can’t pay because of insolvency.

Is redundancy pay on top of the notice period?

Yes, it is. Redundancy pay is separate from notice pay.

The employee should work through their statutory notice period. If you want them to leave straight away, you need to pay them for the notice period. That’s called a payment in lieu of notice, and remember, it has different tax treatment - it's always taxable.

So if someone’s facing redundancy, you’ll need to pay them:

1. Redundancy pay (some of which might be tax free), and
2. Notice pay (which is fully taxed), plus
3. Any other outstanding pay, like unused holiday pay.

What is the difference between redundancy and severance pay in the UK?

In the UK, redundancy pay is the term used when someone loses their job because the role no longer exists. Redundancy pay is a legal entitlement in many cases.

Severance pay isn’t a legal term in UK employment law. It’s usually used to describe contractual redundancy pay or a one-off exit package agreed between the business and the employee. It's often more generous than the legal minimum payment.

Offering severance or enhanced redundancy packages? Think about the tax implications carefully. Some parts might be tax free, others could be fully taxable. If you’re unsure, get advice before making promises.

Is redundancy pay and statutory redundancy pay the same thing?

Not always. Statutory redundancy pay is the legal minimum pay. The employer pays when the employee qualifies (2+ years’ service, proper redundancy, etc.). It’s based on a formula set by the government.

Redundancy pay is a broader term. It can include:

• The statutory bit
• Contractual redundancy pay (extra, written into the employment contract)
• Non-statutory pay (a gesture from the employer, not a requirement)

If you’re offering anything above the legal minimum, take careful consideration of the tax treatment. The first £30,000 might be tax free. Anything more? You could need to deduct tax and NI depending on the setup.

This blog is based on information available to Rippling as of May 13, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.