Termination Payments and Redundancy

When your employment ends, whether through redundancy, dismissal, or resignation, you may receive various payments from your employer. Understanding what's taxable and what's tax-free can make a significant difference to how much money you actually receive. The good news is that statutory...

What is a termination payment?

A termination payment is any payment you receive from your employer when you leave your job. This could include:

Statutory redundancy pay
Enhanced or additional redundancy payments
Holiday pay
Unpaid wages
Company benefits (such as bonuses)
Payment in lieu of notice (PILON) – money paid instead of working your notice period
Non-cash benefits, such as company property you keep after leaving

Your employer is responsible for making sure your termination payment is taxed correctly.

Statutory redundancy pay

If you're an employee who has worked for your current employer for 2 years or more, you'll normally be entitled to statutory redundancy pay. The amount depends on your age and length of service:

Half a week's pay for each full year you were under 22
One week's pay for each full year you were 22 or older, but under 41
One and a half week's pay for each full year you were 41 or older

Length of service is capped at 20 years.

Your weekly pay is the average you earned per week over the 12 weeks before the day you received your redundancy notice. If you were made redundant on or after 6 April 2026, your weekly pay is capped at £751 and the maximum statutory redundancy pay you can receive is £22,530.

You have 6 months from the date your job ends to apply for statutory redundancy pay.

The £30,000 tax-free allowance

You do not usually pay tax or National Insurance on the first combined £30,000 of:

Statutory redundancy pay
Additional severance or enhanced redundancy payments
Non-cash benefits you keep after your employment ends

You'll pay tax on any amount over a combined total of £30,000. Your employer will also pay employer Class 1A National Insurance on any amount over £30,000.

This £30,000 threshold applies to the combined total of these payments, not to each payment separately.

What you always pay tax and National Insurance on

Some parts of your termination payment are treated as earnings, which means they're always subject to tax and National Insurance. You'll pay tax and National Insurance on:

Unpaid wages
Holiday pay
Bonuses
Payments for agreeing to restrictive covenants (agreements not to do certain things after leaving, such as working for competitors)
Any payments you receive instead of working during your notice period

What you never pay tax and National Insurance on

You will not pay tax and National Insurance on:

Contributions your employer makes to a registered pension scheme as part of your termination payment (though you'll pay tax on any employer contributions above the Annual Allowance)
Legal costs related to the settlement that your employer pays directly to your solicitor
A termination payment you receive because of an injury, illness or disability that prevents you from continuing to do your job

Post-Employment Notice Pay (PENP)

If you don't work your full notice period, the situation becomes more complex. You'll pay tax and National Insurance on the part of your termination payment equivalent to what you would have earned if you were working your notice.

This is called Post-Employment Notice Pay (PENP) and your employer will calculate how much you have to pay tax and National Insurance on. PENP may apply to:

Lump sum payments in lieu of notice (PILON)
Pay you receive while on 'gardening leave' (where you remain on the payroll but are asked not to work)
Part of any severance, enhanced redundancy or non-cash benefits you receive

Example: You receive statutory redundancy pay of £10,000 and your employer adds a severance payment of £5,000, making a total of £15,000. You didn't work your 4-week notice period, and you earn £500 per week, meaning you would have earned £2,000 in taxable wages during your notice.

You'll pay tax and National Insurance on £2,000 of your severance payment. You don't pay tax on the remaining £13,000 because it's under the £30,000 threshold. The statutory redundancy pay of £10,000 remains tax-free.

How tax is deducted

Your employer will automatically deduct any tax and National Insurance due on your termination payment in your final payslip. They'll put any taxable parts through their payroll and deduct Income Tax or National Insurance under Pay As You Earn (PAYE).

If you receive your termination payment after you've been given your P45, your employer will use an '0T' tax code. Tax will be deducted on the assumption that you've used up your Personal Allowance for the current tax year.

If your termination payment means your total income for the tax year (2025/26) is higher than the previous year, you may pay more tax than usual.

If you complete a Self Assessment tax return, you should include your termination payment as 'additional information'.

When you're not entitled to statutory redundancy pay

You're not entitled to statutory redundancy pay if:

Your employer offers to keep you on
Your employer offers you suitable alternative work which you refuse without good reason
You're dismissed for misconduct (as this doesn't count as redundancy)
You fall into certain specific categories (such as crown servants, members of the armed forces, police services, or domestic servants who are members of the employer's immediate family)

If you think you've paid too much tax

If you believe you've paid too much tax or that your termination payment hasn't been taxed correctly, contact HMRC's Income Tax enquiries team.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.