Do you have to pay tax on your redundancy pay?

“Is my redundancy pay taxable?” is one of the first questions people ask when facing redundancy. Well, as redundancy pay is compensation for your job loss, it qualifies for special tax treatment, so up to £30,000 is tax free. But many people don’t realise that other elements of their package – holiday pay and pay in lieu of notice – will be taxed in the same way as any other pay.

What is tax free?

Up to £30,000 of redundancy pay is tax free. Any non-cash benefits that form part of your redundancy package, such as a company car or computer, will be given a cash value and added to your redundancy pay for tax purposes. This may then take it over the £30,000 limit.

What will I be taxed on?

Any redundancy pay over £30,000

When you get it, your employer will usually have deducted the tax but there’s a high probability they won’t have taken off the right amount. So you may need to claim tax back or pay extra tax. See Overpayment or underpayment of tax below.

Holiday pay, pay in lieu of notice, wages owing and bonus payments

If these are due to you under your contract of employment, they don’t count as tax-free redundancy pay. So, tax and National Insurance contributions will be deducted as usual from these payments before you get them.

Avoid nasty shocks – work out the tax on your redundancy pay in advance

Wondering what to do with your redundancy pay?Work out roughly what your redundancy package will be, taking into account what’s tax free and what isn’t.

Tax-free redundancy pay: Example 1

Colin receives a redundancy payment of £18,000 plus one month’s pay in lieu of notice, totalling £1,000. The redundancy payment is tax free, but Colin’s employer will have to deduct tax and National Insurance contributions from the additional £1,000.

Tax on redundancy pay: Example 2

Kirandeep receives a redundancy lump sum of £32,000. She also gets to keep her company car, which is valued at £8,000.

The value of the car is added to the redundancy payment, making £40,000. Only £30,000 is tax free, so Kirandeep will pay tax on the remaining £10,000 – as she’s a higher-rate taxpayer, that’s 40%.

If you’re not sure how much redundancy money you’re entitled to, read our guide on redundancy pay.

Overpayment or underpayment of tax

How much tax you pay is calculated on a yearly basis. So, if you’ve stopped working part way through the tax year, you might have paid too much.

Never assume your employer has got the calculations right. The tax deducted could be too much or too little. It’s up to you to notify HM Revenue & Customs. You may be asked to complete a Self Assessment tax return at the end of the tax year to pay any additional tax due.

Making the most of your redundancy pay

If you don’t need all your redundancy money to meet your living expenses, consider saving or paying off debts, or even contributing to your pension.

Putting your redundancy payment into a pension

Paying into a pension plan can be a tax-efficient option. But tax and pensions are rarely straightforward, and there are limits on how much you can pay in, so it’s worthwhile getting help from an independent financial adviser.

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