How is a redundancy payment taxed?
Answered 17 March 2026
Here is a comprehensive answer on how a redundancy payment is taxed in the UK.
How is a Redundancy Payment Taxed?
What the law says
Charging provision — Section 401 ITEPA 2003
Genuine redundancy payments (both statutory and non-statutory) are always charged to income tax under section 401 ITEPA 2003 as specific employment income — never as general earnings under section 62 ITEPA 2003. This was confirmed by the House of Lords in Mairs v Haughey (66TC273).
The £30,000 threshold — Section 403 ITEPA 2003
Section 403(1) ITEPA 2003 provides that termination awards subject to section 403 (including redundancy payments) count as employment income only to the extent that they exceed £30,000. This threshold does not apply to post-employment notice pay (PENP).
Statutory redundancy payments and approved contractual payments are not within the definition of "relevant termination awards" and therefore are not subject to the PENP rules. They always benefit from the £30,000 threshold.
Post-Employment Notice Pay (PENP) — Sections 402A–402E ITEPA 2003
With effect from 6 April 2018, an element of termination payments — the PENP — is chargeable to income tax as general earnings and does not benefit from the £30,000 threshold. PENP is calculated using the statutory formula: (BP × D ÷ P) − T.
National Insurance Contributions (NICs)
- The PENP element (chargeable as general earnings under s.402B ITEPA 2003) attracts Class 1 (employee and employer) NICs.
- The element of a redundancy payment above £30,000 that is subject to income tax under section 403 ITEPA 2003 (but not Class 1 NICs) attracts Class 1A employer-only NICs. There is no employee NICs liability on this element.
- The Class 1A employer NICs rate on termination awards is the prevailing employer rate (currently 15% for earnings periods starting on or after 6 April 2025).
- No Class 1A NICs liability can arise from payments charged to tax under section 403 ITEPA 2003 below the £30,000 threshold.
HMRC guidance / practice
Identifying a genuine redundancy payment
HMRC emphasises that it is vital to identify what each element of a termination package is actually for, and to treat each element separately. Payments that are really terminal bonuses (e.g. for meeting production targets) are not compensation for redundancy and do not qualify for section 401 treatment.
Contractual redundancy payments
Even where there is a contractual right to a redundancy payment, it is still taxable only under section 401 ITEPA 2003 — not as earnings under section 62. However, a payment triggered by "termination for any reason" (not specifically redundancy) is treated as deferred earnings and taxed under section 62, following Dale v De Soissons (32TC118).
Payments in lieu of notice (PILONs)
PILONs made alongside a redundancy payment are never treated as redundancy compensation. They are taxed separately — contractual PILONs as earnings under section 62, and any PENP element under sections 402A–402E.
Non-statutory redundancy schemes
Payments from non-statutory redundancy schemes (e.g. enhanced employer schemes) also fall within section 401 ITEPA 2003 and benefit from the £30,000 threshold, as confirmed by HMRC's Statement of Practice 1/1994.
Pension contributions
Only the portion of a redundancy payment above the £30,000 threshold (which is classed as employment income) counts as "relevant UK earnings" for pension contribution relief purposes. The first £30,000 is not classed as employment income and does not count.
Practical example
HMRC illustrates the correct treatment with a worked example: in a £33,000 redundancy package paid before 6 April 2018, only the £13,000 genuine redundancy element fell within section 401 ITEPA 2003 and was within the £30,000 threshold (so no tax). The remaining elements — a £2,500 contractual PILON, a £7,500 bonus, and a £10,000 restrictive covenant payment — were taxable as general earnings or under section 225 ITEPA 2003 respectively.
Summary table
| Element | Tax treatment | NICs |
|---|---|---|
| Redundancy pay (first £30,000) | Exempt from income tax (s.403 threshold) | No NICs |
| Redundancy pay (above £30,000) | Income tax as specific employment income | Class 1A employer NICs only |
| PENP | Income tax as general earnings (s.402B) | Class 1 employee & employer NICs |
| PILON (contractual) | Income tax as earnings (s.62) | Class 1 NICs |
| Bonus / terminal pay | Income tax as earnings (s.62) | Class 1 NICs |
Citation sources
Payments within section 403 of ITEPA 2003 qualify for the £30,000 exemption and tax will only be charged on amounts in excess of the exemption. Regardless of the tax charge, no Class 1A NICs liability can arise from payments and benefits charged to tax under section 403 of ITEPA 2003.
With effect from 6 April 2018, an element of all payments received in connection with the termination of a person’s office, or employment are chargeable to income tax as general earnings. EIM13874 defines the term ‘relevant termination awards’ and explains that relevant termination awards are split into 2 elements: post-employment notice pay (PENP) termination awards subject to section 403 ITEPA 2003 Section 403(1) ITEPA 2003 provides that payments, and benefits that fall within section 401(1)(b
A taxpayer tells you that a redundancy payment of £33,000 has been taxed in full under PAYE. You find that this means that £3,000 was subjected to PAYE after applying the £30,000 threshold under EIM13505. The payment was paid in full before 6 April 2018. You make enquiries and find that the elements of the payment were: a contractual payment in lieu of notice of £2,500 - this is taxable under section 62 ITEPA 2003 (see EIM12976) a bonus of £7,500 for the last employment period - this is also tax
EIM12810 and EIM13750 explain that compensation for loss of employment by reason of redundancy is always taxable only under Section 401 ITEPA 2003 even if there is a contractual right to it. Many other payments arising under a term in a contract are taxable as earnings from employment (see EIM00515) under section 62 ITEPA 2003. This includes payments that are made at the same time as redundancy but for a different reason. For example, it’s common to make a payment in lieu of notice (PILON) on re
With effect from 6 April 2018, some termination payments and benefits are chargeable to income tax as general earnings and do not benefit from the £30,000 threshold available in section 403 ITEPA 2003. EIM13874 defines the term ‘relevant termination awards’ and explains that relevant termination awards are split into 2 elements: post-employment notice pay (PENP) termination awards subject to section 403 ITEPA 2003 Statutory redundancy payments and approved contractual payments (as defined at sec
Many employers make redundancy payments under non-statutory schemes and arrangements. They include: schemes authorised by the Secretary of State for Employment under Section 157 Employment Rights Act 1996 - these schemes are a substitute for the statutory payments under the Employment Rights Act 1996 (see EIM13760) and are at least as high as them general schemes providing payments to employees who are not covered by Employment Rights Act 1996 entitlements (for example, Civil Servants and Nation
ffect for the purpose of identifying the extent to which section 402B applies to termination awards in respect of the termination of the employment of the employee. 2 In this section “ relevant termination award ” means a termination award that is neither— a a redundancy payment, nor b so much of an approved contractual payment as is equal to or less than the amount which would have been due if a redundancy payment had been payable. 3 If the post-employment notice pay (see section 402D) in respe
Section 189(2)-(7) Finance Act 2004 For most people the amount of tax relief they can have on their pension contributions is limited to 100% of their relevant UK earnings that are chargeable to income tax for the tax year (there is another low limit for some - see Annual limits above). If relief is sought within the 100% limit an individual may want to establish how the various payments received as part of earnings have been taxed, to see what counts for this limit. The following earnings are ex
termination award should be treated as general earnings. In essence, all Payments in Lieu of Notice (PILONs) became taxable as earnings and will not benefit from the £30,000 tax-free threshold. With effect from 6 April 2020 The Social Security (Contributions) (Amendment No. 2) Regulations 2018 made changes to NICs legislation to mirror the tax position for PILONs and applied a Class 1 (employee and employer) NICs liability to termination awards that fall within new section 402B ITEPA 2003 by tre
Having found what each element of a termination package is for (see EIM12805), each element should then be looked at separately following the structure set out below. First, consider section 62 ITEPA 2003: is the payment or benefit earnings from the employment? See EIM12850 for the more common termination payments that are within section 62. Material on earnings generally is at EIM00600 and subsequent guidance, particularly EIM00530 regarding non-money receipts. If section 62 does not apply, sec