What is the tax-free redundancy limit?

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## The Tax-Free Redundancy Limit

### What the law says

The core rule is found in **section 403(1) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)**:

> "The amount of a payment or benefit to which this section applies counts as employment income of the employee or former employee for the relevant tax year **if and to the extent that it exceeds the £30,000 threshold**."

This means the **first £30,000** of a qualifying termination/redundancy payment is **entirely free of income tax**. Only the amount above £30,000 is chargeable to income tax as employment income.

**How the threshold is applied (s.404 ITEPA 2003):** All payments from the same employer (or associated employers) in respect of the same termination must be aggregated when applying the £30,000 threshold. If payments are received across different tax years, the £30,000 is set against earlier years first.

**Important caveat — Post-Employment Notice Pay (PENP):** From 6 April 2018, the rules were amended. Under **s.402A–402C ITEPA 2003**, "termination awards" are split into two elements:
1. **Post-employment notice pay (PENP)** — treated as general earnings under s.402B and taxed in full; it **cannot** benefit from the £30,000 threshold.
2. **The remainder of the termination award** — subject to s.403 and benefits from the £30,000 threshold.

**Statutory redundancy payments** are separately exempt from tax as earnings under **s.309 ITEPA 2003**, but still fall within s.401 as specific employment income and count toward the £30,000 threshold.

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### HMRC guidance / practice

- HMRC confirms that **statutory redundancy payments and contractually approved payments are not within the definition of "relevant termination awards"** and therefore are **not subject to PENP rules**. They always benefit from the £30,000 threshold under s.403.

- In practice, HMRC notes that most statutory redundancy payments are below £30,000, so tax is rarely payable on them — but **all payments in respect of a termination (excluding PENP) must be aggregated** when applying the threshold.

- Any part of a redundancy payment **above £30,000** is classed as employment income and counts as **relevant UK earnings** (e.g. for pension contribution purposes). The first £30,000 does not count as employment income at all.

- HMRC provides a worked example showing how the threshold operates across different payment types at termination:

| Payment | Amount |
|---|---|
| Statutory redundancy payment | £25,000 |
| Relevant termination awards subject to s.403 | £35,000 |
| **Total subject to s.403** | **£60,000** |
| Less £30,000 threshold | (£30,000) |
| **Taxable amount** | **£30,000** |

- HMRC also warns that it is **vital to correctly identify what constitutes a redundancy payment**, as other payments made at the same time (e.g. pay in lieu of notice, holiday pay, terminal bonuses) may be taxable in full as earnings and do not benefit from the £30,000 exemption.

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**Summary:** The tax-free redundancy limit is **£30,000**. Genuine redundancy payments (statutory and non-statutory) up to this amount are free of income tax. Any excess is taxable. However, any **post-employment notice pay** element is fully taxable regardless of the £30,000 limit.

Payment	Amount
Statutory redundancy payment	£25,000
Relevant termination awards subject to s.403	£35,000
Total subject to s.403	£60,000
Less £30,000 threshold	(£30,000)
Taxable amount	£30,000