Redundancy pay after tax

ITEPA 2003 s.401↗ exempts the first £30,000 of any termination payment from income tax. The exemption is shared across statutory redundancy, employer enhanced, ex-gratia and severance. It does not apply to salary, contractual bonuses or holiday pay that you would have earned anyway.

Above £30,000 you pay income tax at your marginal rate. Employee NICs do not apply to the over-£30k slice. Employer Class 1A NIC does apply at 15% (2026/27) and is paid by the employer, not by you. HMRC guidance: income tax treatment of termination payments.

Since April 2018 a portion of any termination payment is automatically deemed to be Pay In Lieu Of Notice, and taxed as earnings. The formula is (BP × D) / P, where BP is basic pay in the last pay period before notice, D is the number of unworked notice days, and P is the number of days in that pay period.

PENP is calculated before the £30k exemption is applied. So if your employer pays you 3 months in lieu, the equivalent of 3 months' basic pay is taxed as earnings, and only what remains of the package sits in the £30k tax-free slice. Source: F(No.2)A 2017 s.5↗ and HMRC EIM13874.

Statutory redundancy: £18,000. Enhanced top-up: £20,000. PILON: £8,000. Total package: £46,000. PENP equivalent: £8,000 (taxed as earnings, full income tax + employee NIC). Remaining £38,000 sits in the §401 bucket: £30,000 tax-free, £8,000 taxable as employment income. Employer pays Class 1A NIC of 15% × £8,000 = £1,200.