Key takeaways
- The first £30,000 of your whole redundancy package is tax-free — statutory pay, enhanced pay and ex-gratia payments combined, not £30,000 each.
- Statutory pay is half a week's pay per year under 22, one week per year from 22 to 40, and one and a half weeks per year at 41 or over, up to 20 years, with weekly pay capped at £751.
- Pay in lieu of notice is taxed like normal salary and does not count towards the £30,000 limit.
- Never sign a settlement agreement without the independent legal advice your employer must pay for.
The first £30,000 of your whole redundancy package is tax-free — statutory pay, enhanced pay and ex-gratia payments combined, not £30,000 each.
Redundancy is the one time the tax system is genuinely generous. While almost everything else you receive is taxed, the first £30,000 of a termination package is tax-free, and statutory redundancy pay carries no National Insurance at all. The catch is in the details: the £30,000 covers the whole package, the statutory minimum is smaller than most people expect, and pay in lieu of notice is treated completely differently. Get those three points right and the numbers are straightforward.
How statutory redundancy pay is worked out
The formula depends on your age during each year of service: half a week's pay for each year under 22, one week's pay for each year from 22 to 40, and one and a half weeks' pay for each year at 41 or over — up to 20 years of service. Your weekly pay is your average over the 12 weeks before redundancy, capped at £751 a week in Great Britain (£783 in Northern Ireland). Here is a worked example from the redundancy pay calculator — age 45, 10 years' service, £800 a week:
| Step | Working |
|---|---|
| Years at 41+ (ages 45–41) | 5 years × 1.5 = 7.5 weeks |
| Years at 22–40 (ages 40–36) | 5 years × 1.0 = 5.0 weeks |
| Total weeks | 12.5 weeks |
| Weekly pay used (capped at £751) | £751.00 |
| Statutory redundancy pay | £9,387.50 |
The statutory minimum is modest by design — the maximum possible payment, 20 years all aged 41+ at the £751 cap, is £22,530.00. Most people's statutory entitlement is well under £10,000, which is why the enhanced offer from your employer matters far more than the statutory figure.
The £30,000 rule — on the whole package
This is the part people get wrong. The £30,000 tax-free limit applies to your entire termination package: statutory redundancy pay, plus any enhanced redundancy payment, plus any ex-gratia payment, all added together. It is not £30,000 per component. Here is what that means on a larger package — age 50, 20 years' service, £751 a week, plus a £20,000 enhanced payment:
| Part of the package | Amount |
|---|---|
| Statutory redundancy pay (25 weeks) | £18,775.00 |
| Enhanced / ex-gratia payment | £20,000.00 |
| Total package | £38,775.00 |
| Tax-free (first £30,000) | £30,000.00 |
| Taxable excess | £8,775.00 |
The £8,775.00 excess is taxed as income in the year you receive it — and because it arrives as a lump sum on top of your salary, it can push you into the 40% band or even the £100,000 allowance taper for that one year. If your leaving date is anywhere near 5 April, the tax year it falls in can be worth real money: the same package split across two tax years can be taxed very differently. That is worth discussing with an adviser before you sign, not after.
The PILON trap
Pay in lieu of notice — PILON — is the exception to everything above. It is not redundancy pay: it is pay for a notice period you did not work, and it is taxed and subject to National Insurance exactly like normal salary. It does not count towards the £30,000 limit either way — it sits outside it and is fully taxable. When you read a settlement offer, separate the PILON line from the redundancy lines before you do any maths: mixing them up is the commonest way people overestimate their tax-free amount. Your employer should itemise them separately on your final payslip.
Consultation and notice: your rights before the money
The money is only half of a redundancy. Before any payment is worked out, your employer has to follow a process: consult with you (and, for 20 or more redundancies, consult collectively for a minimum period), consider alternatives such as redeployment or reduced hours, and use a fair selection method. If the process is flawed, the dismissal can be unfair even if the payment is right — and an unfair dismissal claim is worth far more than the statutory payment. Keep every letter, every meeting note and every version of the selection criteria: they are your evidence if the process was not what it should have been.
Notice periods matter too, and they interact with the payment. Your statutory minimum notice is one week per year of service up to 12 weeks, and your contract may give you more. If your employer pays you in lieu of notice instead of making you work it, that PILON is taxed and subject to National Insurance like normal pay — it is not part of the £30,000 tax-free limit, as explained above. And your notice period counts towards your continuous service, which can push you over a service threshold or into a higher age band for the statutory calculation. The leaving date is not a detail: a redundancy that takes effect a week later can mean a different payment, a different tax year, and a different outcome.
Negotiating the package: what is actually negotiable
Statutory redundancy pay is a floor, not an offer. Everything above it — and most of the terms around it — is negotiable, and the negotiation is where the real money is. The first thing to ask for is an enhanced payment: many employers pay more than the statutory minimum, often expressed as extra weeks per year of service, and the enhanced amount is still covered by the £30,000 tax-free limit as long as the total package stays under it. The second is the notice period: if your contract gives you three months' notice but the employer wants you gone in one, the remaining two months are PILON, which is taxable — so ask for the notice to be worked, or for the PILON to be grossed up so the tax does not come out of your pocket. The third is outplacement support and a reference: worthless on a spreadsheet, but worth a great deal when you are applying for the next job.
What you should never do is sign a settlement agreement without taking the independent legal advice the employer is obliged to pay for. The agreement will almost always include a waiver: you give up the right to bring any claim against the employer, including claims you have not thought of yet. The advice is free to you and it is the only protection against signing away something valuable for a few hundred pounds. And check the dates before you sign anything: statutory redundancy pay is based on your age and service on the date your employment ends, not the date you were told, so a termination date that slips past a birthday can add a week of entitlement. Small details, but redundancy is a negotiation where the details are the money.
What to check before you sign
Four things. First, your years of service: continuous employment with the same employer, and you need at least 2 years to qualify for statutory pay at all. Second, your 12-week average pay: check the employer used the right weeks, especially if your pay varies with overtime. Third, whether the offer beats the statutory minimum — if it does not, you are being offered less than the law requires. Fourth, the tax year: a package paid in March versus April can change the tax by thousands. And keep the paperwork: HMRC can ask about a redundancy payment years later, and the breakdown is your evidence that the £30,000 was applied correctly.
The one thing to remember about redundancy is that the statutory figure is the floor, and the £30,000 tax-free limit is on the whole package.
Check both numbers before you sign anything: run your age, service and weekly pay through the redundancy pay calculator to confirm the statutory figure, then add up everything else — enhanced payment, PILON, holiday pay, any ex gratia amount — and check the total against the £30,000 limit. If the package is over the limit, the excess is taxable, and you should know that before you agree the split, not after the money arrives. And never sign a settlement agreement without the independent legal advice your employer must pay for: it is free to you, and it is the only thing standing between you and a waiver you will regret.
Check your statutory figure
Run your age, service and weekly pay through the calculator to confirm the statutory figure, then check the total package against the £30,000 limit before you sign.
Figures from the 2026/27 rates, last checked against GOV.UK on 5 November 2026. See all the rates on UK tax rates 2026/27. Next in this series: Minimum wage 2026: the age bands and how to check your pay.