What tax do I pay on redundancy payments?

What is redundancy?

You are made redundant if you lose your job because your employer needs fewer employees where you work, for example, if your job is no longer needed because of advances in technology or the volume of work reduces at your place of work.

Employers have to follow rules when they select staff for redundancy. For more information on your rights when you are made redundant, see GOV.UK.

When you become redundant (actually it is your job that becomes redundant) your employer may make a payment to you, called a redundancy payment. This is to compensate you for being made redundant.

You may qualify for statutory redundancy pay to be paid by your employer, if you have worked for your employer for two years or more. Employers pay statutory redundancy pay at levels which are fixed by the government and based upon government rules. It is the legal minimum, so your employer cannot pay you less than this, if you qualify. You can find out more about statutory redundancy pay below and on GOV.UK.

Your employer can pay you more than the statutory amount if they choose to do so or if you have terms in your employment contract which offer more favourable redundancy treatment than the statutory scheme. This could mean a bigger lump sum or getting a pay-out even if you have been there for less than two years.

Your redundancy package can include payments that are made for other reasons than your redundancy. The nature of these payments (what they are for) affects how they are taxed. For example, you may get a redundancy package that includes things that you have a contractual right to receive, such as holiday pay (for holiday you have built up but not taken) or pay in lieu of notice (if you are not asked to work your notice period) as well as a redundancy payment. Such payments of holiday pay or pay in lieu of notice are taxable as usual.

Genuine redundancy payments must also be distinguished from other payments which would be taxable as earnings. For example, a payment that is really a bonus, say for meeting production targets or doing extra work in the period leading up to redundancy, is not compensation for redundancy.

You may also be able to claim additional compensation from your employer if you were unfairly selected for redundancy, for example because of your sex, race, religion or a disability. You should seek legal advice if you think this may apply to you.

Employer Insolvent

If you have been made redundant and your employer is now insolvent, you can claim your payment from the Insolvency Service. The insolvency practitioner dealing with the affairs of your employer should provide you with factsheet (RP1) and further information. There is more information on GOV.UK about how to apply for money you are owed.

Tax and NIC will be taken off any payments that they make to you that are ordinarily taxable or chargeable to NIC.

Further links to detailed information about how payments from the Insolvency Service work, can be found on GOV.UK.

In particular, their specific payments guidance explains:

• how they calculate each kind of payment
• what deductions they have to make
• what to do if you think your payment is wrong

What is statutory redundancy pay?

Statutory redundancy pay is an amount which your employer must pay you in certain circumstances if you are made redundant. The amount you get is calculated according to how much you were paid, how long you have worked for your employer as well as how old you were during your service for your employer.

For more information on how statutory redundancy pay is calculated, see GOV.UK.

There are two key conditions to be entitled to statutory redundancy pay:

1. You must be an employee AND
2. You must have at least two years’ service with your employer.

Therefore, you will not be entitled to statutory redundancy pay if you are an employee but you have less than two years’ service with your employer.

Similarly, if you are a ‘worker’ for employment law purposes (this will include most people on a ‘zero hours’ contract) then you will not be eligible for statutory redundancy pay, even if you have more than two years’ service. Some employers may still offer to pay you some kind of redundancy payment however.

Statutory redundancy pay is a cost to the employer – it cannot be claimed back from the government unlike some other statutory payments.

When is a redundancy payment taxable and chargeable to NIC and are there any reliefs available?

There are some special tax rules that apply to redundancy payments (payments or benefits made in connection with the termination of employment, for example, an ‘ex gratia’ payment to compensate you for losing your job) provided that the payments are not otherwise taxable under general principles:

• There is an exemption from income tax on payments up to £30,000 from one job. If you have more than one job the exemption applies to each job – see the example of Jack. This rule applies unless:
  • The employers are connected or associated in some way, for example one company owns all the shares in the other or someone has two businesses – see the example of Chris.
  • You go back to work for the same employer – see the example of Martin.

What this means is that if you only get a statutory redundancy payment, then due to the relatively small amounts involved, this will always fall within the £30,000 exemption and be tax-free.

Because such a redundancy payment is not taxable (nor NICable – see below), it should not be included on your P45. As such, your employer can pay it to you outside of normal payroll processes, although you should be given a letter explaining what the payment is, in case you need a record of the income for other reasons –for example, for benefits purposes. Keep a copy of the letter for your own records. In the situation where your employer taxes a redundancy payment incorrectly, you should contact HMRC or seek some advice from TaxAid.

Whatever is left over of the £30,000 exemption is available to set against any ‘extra’ amount of redundancy payment that you might receive from your employer. Remember that the payment has to be discretionary/compensatory to qualify.

You do not have to pay any NIC at all on redundancy payments (even if over £30,000), but if the redundancy payment is part of a package, some of the other amounts in the package may be both taxable and subject to NIC.

What else might be paid in addition to redundancy payments and what is the tax/NIC treatment?

Unpaid wages and profit target payments or overtime: these are taxable in full and NIC is payable, even if you receive the amounts after your employment has ended.

Payments in lieu of notice (PILON): you might be expected to work your notice period before your redundancy takes effect, but often you will get a payment in lieu of notice (that is, instead of being given notice) and be able to leave straight away. From 6 April 2018 such payments are always fully taxable as earnings and liable to NIC – whether contractual or non-contractual (where a non-contractual PILON is included in a termination payment, there are some special rules to help determine the amount taxed as earnings).

This can be a complex area and the position depends on the particular facts, so you may need to take advice from a tax adviser. We tell you how you can find a tax adviser, including through the tax charities, in our Getting Help section.

Holiday pay: this is treated in the same way as wages, so it is taxable in full and subject to NIC.

Restrictive covenant: any payment made to you on the basis that you restrict your activities in some way is taxable in full and NIC is payable.

Employer contributions to a pension scheme: normally these are totally free from tax and NIC.

Occupational pensions: you may decide to start drawing your occupational pension if you are made redundant. These are taxable in full, but no NIC is payable. You may be able to commute, that is exchange, part of a pension entitlement for a tax-free lump sum. This normally only applies if you have reached a minimum age. You can read more about tax on pensions in our pensioners section.

How does my employer deal with any income tax and NIC due on the taxable parts of my redundancy package?

If there is any doubt about whether the £30,000 exemption applies to any element of your package, your employer may agree with HMRC how you will be taxed before they pay anything to you. This does not always happen.

As with your normal wages, your employer should deal with the tax and NIC due on any taxable parts of your redundancy package under the Pay As You Earn (PAYE) system, but the exact treatment, and any action you need to take, will depend on the timing of the payment.

When you are made redundant, your employer should issue you with form P45.

Payment before your employment ends

If your redundancy payment is made before you leave your job and before your employer issues you with form P45, any taxable amounts, such as unpaid wages and any part of a redundancy payment over £30,000, should be included in your final pay and subject to tax/NIC as normal. You will be taxed using your normal tax code.

Payment after your employment ends

If your redundancy payment is made after you leave your job and your employer has already issued form P45, your employer will use a 0T tax code on a Week 1/Month 1 basis (non-cumulative) against any taxable amounts. This means you will be treated as having no personal allowance and when applied on a Week 1/ Month 1 basis, the 0T code will calculate the tax to be deducted at basic, higher and additional tax rates as if it were your first payment of PAYE income in the tax year (in other words it is not on the normal cumulative basis). The employer will take off tax at the appropriate rates before paying you the balance.

⚠️ Remember: this will only affect you to the extent that your package contains taxable elements, such as unpaid wages, or if your redundancy payment is over £30,000.

Your employer should not issue another P45 but should give you a letter showing the date of payment, the gross amount and the amount of income tax deducted under PAYE.

The 0T code means you may overpay tax on the redundancy payment. You will be able to reclaim any overpaid tax and should contact HMRC to check your position. They may not be able to do this until the end of the tax year, when they will be able to reconcile your pay and tax position fully.

You can see how tax is taken off redundancy payments in the example of Tom.

With regards to NIC on taxable payments made after the P45 has been issued, your employer should deduct NIC as normal – unless it is an ‘irregular’ payment like accrued holiday pay in which case they should treat it as a weekly payment. This may be a problem if you are usually paid monthly, as a weekly earnings basis will only give you £242 (2023/24) NIC-free pay to use against the payment, rather than the monthly earnings basis that you may be used to (giving you £1,048 (2023/24) NIC-free pay). This may mean you receive less pay than you were expecting. However, HMRC will not make any refunds of National Insurance in these circumstances.

What if I do not receive the redundancy payment immediately?

You will be taxed on the redundancy payment in the tax year that you get it, even if you were made redundant in an earlier tax year.

The £30,000 limit applies to one particular job and can be carried forward to be used against any later redundancy payments from the same job. There are two examples which explain this in more detail:

• Kevin: payment by instalments in the same tax year;
• Sally: payment by instalments in two tax years.

Any NIC that is payable on any part of a redundancy package paid later will be charged at whatever the rates are when you receive the payment.

What if I get items other than cash as my redundancy payment?

Your redundancy package can include items such as use of a car, fuel, accommodation or a loan at a reduced rate of interest.

You will be taxed for any year on the 'cash equivalent' of the goods concerned to the extent that the cash equivalent, together with any actual cash you receive, exceeds £30,000. An exception to this rule is loans that are waived. If you have a loan from your employer and it is waived (in other words you are no longer obliged to pay back) as part of a redundancy package, it is taxable in full even if the total value of your package is less than £30,000. Contact HMRC using the details on GOV.UK if you need more information on this.

If I am unemployed after my redundancy – how do I claim a tax repayment?

As we explain below, if you are made redundant, you may be eligible for a tax refund on your pre-redundancy earnings.

If you are claiming jobseeker's allowance (JSA) or universal credit (UC), you must give your form P45 to the Jobcentre as soon as you claim the benefit.

They will use this to work out whether you will be entitled to a repayment when you stop claiming or once the tax year ends on 5 April, whichever comes first.

If you are not claiming JSA or UC and will be unemployed for over four weeks, you will need to fill in form P50 – claim for repayment of tax when you have stopped working and send it to HMRC with parts 2 and 3 of your form P45 (or details of any payment made to you after the P45 was issued). You can find more information on reclaiming tax from HMRC on form P50 on our page What if I pay too much tax?

What if I don’t get a form P45?

If your employer goes into liquidation, things may get quite chaotic and you might not be given much notice/a form P45 etc.

If your employer does not provide you with a form P45 summarising your pay and taxes to the point of termination, in the first instance you should ask the insolvency practitioner to provide you with one.

If you don't know who the insolvency practitioner is, contact the Insolvency Service which should hold their details and give you further support.

If this is not successful, then to the extent you need a record of your pay and tax details for that employment, you should use the year-to-date pay and tax details from your last payslip (see below), along with the details from any paperwork sent to you by the National Insurance Fund (if your employer was insolvent).

If your employer provides you with electronic payslips or other payroll forms, you should try and ensure you download these and keep separate copies in case you no longer have access to them via your employer’s online payroll system.

You should be aware that if an employer goes into liquidation, they may not have paid over to HMRC some of the amounts deducted from you via the payroll, due to them being in financial difficulty. In this situation you should not have to pay it again, but if you are on a low income and HMRC contact you, you should seek some advice from TaxAid.

What if I don’t have access to my payslips?

In this event, provided that your employer submitted the relevant information to HMRC via Real Time Information (RTI), then you may be able to access the details via your Personal Tax Account.

Once you are logged in, you should click on ‘Pay As You Earn (PAYE)’, ‘Check current tax year’, ‘View or update employment details’ and then ‘Check payments received’ under ‘Income received to date’. You should then be able to view year to date figures for taxable income, income tax paid and National Insurance paid

Can I claim a refund for amounts withheld from my earnings if I am made redundant?

This depends on the nature of the amount withheld.

Tax

You may be eligible for a refund of amounts withheld from you so far in the tax year if you are made redundant, based on unused personal allowances (and potentially unused basic and higher rate bands). However, because your ultimate liability to tax is calculated annually, whether a refund is due will depend on what taxable income you receive between the point of being made redundant and the end of the tax year.

If you get another job and give your new employer a P45 from your old job, your new employer (if there is time before the end of the tax year) should refund any overpaid tax to you via the payroll. We explain how this happens here.

If you start a new job and cannot provide them with a P45, you should ask to complete a Starter Checklist. HMRC should then automatically reconcile your position after the end of the tax year (that is, after 5 April).

If you are not starting a new job, it is possible to get an in-year repayment of income tax if you are not claiming taxable benefits (like jobseeker’s allowance) or receiving a pension from your employer. In these circumstances you should complete form P50.

If you are claiming benefits after being made redundant, we explain above what happens.

National Insurance contributions

It is not normally possible to claim a refund of NIC, unless they have been deducted in error. National Insurance is calculated and paid according to your pay period, and is not generally reconciled on an annual basis like for tax.

Pension contributions

You cannot usually claim a refund of the pension contributions which you have already made unless you opt out of a pension scheme (or leave the job) within 30 days of starting.

However, you might be able to get a ‘short service’ refund of your contributions from some ‘defined benefit’ pension schemes if you leave within two years of joining. See MoneyHelper and GOV.UK for more information.

Student loan repayments

There are different repayment thresholds depending on your student loan repayment plan; these are explained in our student loan guidance. It is possible to request a repayment from the Student Loans Company (SLC) if your earnings during the tax year are below your student loan repayment thresholds. This is explained in more detail in our guidance on Plan 1 loans and Plan 2 loans, but it is a similar process if you have a postgraduate or Plan 4 loan.

What about any retraining costs or counselling my employer pays for?

Any costs your employer pays to help you adjust to redundancy or to help you retrain or find a new job, including any related travel expenses, are usually exempt from tax. Counselling services provided on redundancy might also be exempt. There is more information in the pages on employment benefits and expenses.

Examples

Tom: redundancy paid before and after leaving job

Tom lives in England and was made redundant from his job on 1 June 2023. He received a redundancy payment of £55,000 with his final pay packet on that day. The first £30,000 of the redundancy payment is tax free, so Tom was taxed using his normal tax code on £25,000 of the redundancy payment. The redundancy payment, less tax, was paid to Tom with his final wages, which were taxed using his normal tax code. He then received his form P45.

Because of the way that relief for the personal allowance is given through the payroll, if Tom does not work for the rest of the year, or only has a small income, such as JSA, he may find that he can claim a tax refund for the year of redundancy because of unused personal allowances.

If, instead, the redundancy payment of £55,000 was not actually paid to Tom until 1 August 2023, after his form P45 had been issued, his employer would have to apply the 0T code on a M1 basis. As above only £25,000 of the payment is taxable. However, under code 0T M1, under which he will receive one month’s allocation of each tax band, tax will be due as follows:

• on £3,142 at 20% is £628.40
• on £7,287 at 40% is £2,914.80
• on £14,571 at 45% is £6,556.95

so Tom will get £44,899.85 (£55,000 - £628.40 - £2,914.80 - £6,556.95).

Note that if Tom was a Scottish taxpayer, then the rates applying to his redundancy payment would be different.

Tom may well have overpaid tax in 2023/24 and should be able to reclaim some tax from HMRC. Contact HMRC if you think this applies to you.

Kevin: payment in excess of exempt £30,000 limit – instalments in same tax years

Kevin received £40,000 from his company's redundancy scheme when he left in March 2023. They agreed to pay him this amount by way of £20,000 on 6 April 2023 and a further £20,000 on 1 January 2024. Both dates are in the 2023/24 tax year.

The £20,000 Kevin receives in April 2023 is exempt from tax. However only £30,000 in total is tax free, so only £10,000 of the £20,000 paid on 1 January 2024 is exempt, leaving the remaining £10,000 taxable as earnings for 2023/24. This sum will have tax and NIC deducted from it when it is paid.

Sally: payment in excess of £30,000 made over two tax years

Sally received a redundancy package of £38,000, with £19,000 payable on 1 September 2022 (during the 2022/23 tax year) and £19,000 being payable 1 May 2023 (during the 2023/24 tax year).

The September instalment of £19,000 is free of tax together with a further £11,000 of the May 2023 payment – so in total £30,000 is exempt.

This means that the remaining £8,000 of the May 2023 payment (£19,000 - £11,000) will be charged to tax as earnings in 2023/24.

Chris: redundancy payments where the employers are connected

Chris is employed by Heavy Rail Ltd. Heavy Rail Ltd owns all the shares in Light Trucking Ltd. When Chris is made redundant by Heavy Rail Ltd on 1 June 2021 his redundancy package is £20,000.

In December 2021 he started working for Light Trucking Ltd but the company relocated to Japan and he is again made redundant on 31 March 2024. Light Trucking Ltd also gives him a £20,000 termination package.

As one company owns the other we say the two companies are connected or associated with each other so Chris can have only one £30,000 exemption. This means the £20,000 received from Heavy Rail Ltd is tax free, but only £10,000 of the payment from Light Trucking Ltd is exempt. The rest is taxable as employment income.

Martin: redundancy when working again for the same employer

Martin is made redundant on 1 December 2021 with a termination package of £25,000. On 1 May 2022 he is re-employed by the same company, but is made redundant from that job on 1 March 2024, being paid a further £10,000 in redundancy.

In both cases the employer is unchanged. Therefore, it is as if Martin is employed by the same person on each occasion. This means he has only one exemption of £30,000 to use. As a result the whole of the first payment of £25,000 is exempt, but only £5,000 of the second payment. Martin will be taxed on the remaining £5,000 during 2023/24.

Jack: redundancy from different employers in two successive jobs

Jack is made redundant on 31 March 2022 and receives a redundancy package of £30,000 which is exempt. His new job is with a completely new employer unconnected with his old one. Sadly the new company have to make him redundant on 31 December 2023 as part of a series of cost cutting measures but they pay him £15,000 redundancy.

This payment is also tax free so effectively Jack will have had the benefit of two £30,000 exemptions. In fact, he could have received a further £15,000 from the second company and this would also be tax free as part of the second £30,000 exemption.

What effect does redundancy have on my working tax credit claim?

If you are an existing tax credits claimant, you must inform HMRC if you are made redundant and stop working enough hours to qualify for working tax credit. You may qualify for a four-week run-on of working tax credit. If you find another job within 7 days, you should remain entitled to working tax credit – assuming the new job meets the hours requirement – but you should notify the details of the new employer to HMRC.

Your redundancy income for tax credits purposes will be the same as your redundancy payments that are liable to tax.

Our tax credits guidance gives more information on reporting changes for tax credits purposes to HMRC.

What effect does redundancy have on my universal credit claim?

Your redundancy income for universal credit purposes will be the same as the amount that is liable to tax, in the assessment period in which it is paid.

Note that if amounts received take your capital to between £6,000 and £16,000, then your claim to universal credit will be affected as you will be deemed to receive income from this capital. Indeed, if you have capital over £16,000 you will not be entitled to universal credit.

You should inform the Jobcentre/DWP as soon as possible of your change in circumstances.

What benefits can I claim if I lose my job?

If you have been employed and you become unemployed, you may be able to claim new-style JSA (the new name for contributory jobseeker’s allowance). If you, or both you and your partner if you have one, have reached state pension credit age then you cannot claim JSA but may be able to claim pension credit. There are national insurance contribution (NIC) requirements associated with new-style JSA which are alluded to in the JSA guidance on the GOV.UK website but in summary the two conditions are that:

• You must have paid, or be treated as having paid, at least 26 weeks contributions on earnings at or above the lower earnings limit (LEL) in one of the last two complete tax years immediately before the relevant benefit year (which is usually the calendar year when you meet the entitlement conditions and submit your claim). This condition can be relaxed in certain situations.
• You must have paid contributions or received NIC credits on earnings of at least 50 times the LEL in each of the two complete tax years immediately before the relevant benefit year.

For example: if you make your claim for benefit in 2023, it is the LEL for 2021/22 or 2020/21 which counts. The LEL for both these years was £120 (2021/22) so to satisfy the first condition you would have had to have earned at least £3,120, over at least 26 weeks in 2021/22 or or 2020/21. The 26 weeks do not need to be consecutive, but weeks in which you earned less than the LEL do not count towards the total.

To satisfy the second condition you would have had to have paid contributions on earnings of £6,000 in each of 2021/22 and 2020/21. Credits wise, you would have needed to have received a Class 1 NIC credit for at least 50 weeks in each of the relevant tax years.

Neither condition requires that you have worked for the whole of the relevant two-year reference period. However, if you don’t qualify for new-style JSA, you will have to rely on income-based benefits. For most people, this will be UC.

Which you claim depends on whether you have paid enough NIC to claim new-style JSA. Even if you have, you may want to claim UC in addition, to top- up your income.

UC is gradually replacing six other benefits: working tax credit, child tax credit, housing benefit, income support, income-related employment and support allowance and income-based Jobseeker’s Allowance. The majority of people can no longer make new claims to these other benefits. Instead, if you need financial support you will probably need to claim UC.

You should also be aware of the following:

• If you are currently receiving any of the benefits UC is replacing, they will end when you make a UC claim.
• UC takes into account savings and your partner’s circumstances and income. If their income is too high, you may not qualify for any help.
• If your partner receives contribution-based ESA – which was the old name for new-style ESA – you may be able to ask for it to be re-assessed to include an income-based element to top-up your income instead of claiming UC. If you are in this situation, you should seek advice.

The benefits system is complicated. If any of the points above apply or you are unsure, you should seek specialist welfare rights advice before making any UC claim.

General guidance on claiming benefits and in particular UC, if you lose your job can be found in our news article: Have you just left work and need to claim universal credit?.

If you want help or advice on JSA or any other benefits, we strongly recommend you speak to a welfare rights adviser who can go through a full benefits check with you.

Where can I find more information?

For more information on redundancy or leaving your job have a look at GOV.UK.

You can calculate how much statutory redundancy pay you can get using the calculator on GOV.UK.

The tax treatment of non-statutory redundancy pay is set out by HMRC in SP 1/94.

HMRC’s technical information on redundancy payments, can be found in their EIM manual, starting at EIM13750.