How much redundancy/settlement is tax-free?
The first £30,000 of redundancy or settlement payments is tax-free. Anything above £30,000 is taxed as normal income.
When you receive redundancy pay or a settlement payment, the tax treatment depends on the amount. The first £30,000 is usually tax-free, but amounts above that are taxed.
What's included in the £30,000?
- Statutory redundancy pay
- Enhanced/ex gratia redundancy pay (your employer's choice to pay more)
- Compensation for unfair dismissal
- Settlement agreement lump sums
- Payment in lieu of notice (PILON)
- Accrued but unpaid holiday
Example
You're made redundant:
Statutory redundancy: £8,000
Enhanced redundancy: £15,000
PILON (2 weeks): £2,000
Total: £25,000
Tax: £0 (under £30,000, so all tax-free)
When you exceed £30,000
You're awarded unfair dismissal compensation: £45,000
First £30,000: tax-free
Remaining £15,000: taxed as income
At 20% basic rate, you'd pay £3,000 tax on the £15,000 overage.
What's NOT included in the £30,000
- Arrears of pay or bonus for work done
- Statutory sick pay
- Damages for breach of contract (usually taxable)
- Interest on late payments
Getting tax advice
If you're receiving a large settlement or redundancy, ask your accountant or tax adviser to calculate the exact tax. The £30,000 exemption has rules about what counts and whether anything above it is taxable.
Last verified: May 2026