Key takeaways
- The first £30,000 of a genuine termination payment, including statutory redundancy pay, is free of Income Tax and National Insurance.
- Pay for any notice period not worked, known as post-employment notice pay, is fully taxable as earnings, whatever the payment is called.
- Holiday pay, salary to the leaving date, bonuses and contractual payments are taxed as normal earnings.
- Above £30,000 the employee pays Income Tax but no NI, and the employer pays Class 1A NI at 15%.
- Statutory redundancy pay is capped at £22,530 for redundancies from 6 April 2026.
When employment ends, the final payments can include several different elements, each taxed differently. Getting the split right matters to both sides: employees want the £30,000 exemption to be applied correctly, and employers carry the risk if PAYE is not deducted where it should be.
The elements of a termination package
| Element | Tax treatment |
|---|---|
| Salary up to the leaving date | Taxable earnings: Income Tax and Class 1 NI |
| Accrued holiday pay | Taxable earnings: Income Tax and Class 1 NI |
| Bonuses and commission earned | Taxable earnings: Income Tax and Class 1 NI |
| Payment in lieu of notice and post-employment notice pay | Taxable earnings: Income Tax and Class 1 NI |
| Statutory redundancy pay | Tax-free within the £30,000 exemption |
| Non-contractual compensation for loss of employment | Tax-free up to £30,000 (with statutory redundancy pay); above that, Income Tax and employer Class 1A NI |
| Employer contributions to a registered pension | Usually tax-free, within the annual allowance |
| Legal fees paid by the employer to the employee’s solicitor under a settlement agreement | Tax-free if paid directly to the solicitor |
| Payments on death, injury or disability | Exempt in full |
The £30,000 exemption
Genuine termination payments, those made because the job has ended rather than as reward for work done, are exempt from Income Tax and National Insurance up to £30,000 in total. This includes statutory redundancy pay and enhanced redundancy pay or compensation for loss of office.
Above £30,000:
- the employee pays Income Tax on the excess at their marginal rate, collected through payroll
- the employee pays no National Insurance on the excess
- the employer pays Class 1A National Insurance at 15% on the excess, reported and paid through payroll in real time
Post-employment notice pay (PENP)
Since April 2018, the basic pay an employee would have earned during any unworked notice period is taxable as earnings, even if the employer calls the whole payment compensation. The rule stops employers and employees converting taxable notice pay into tax-free compensation.
The calculation uses the employee’s basic pay (excluding overtime, bonuses and benefits) for the notice period not worked, measured from the date notice is given. If the termination payment is less than the PENP figure, all of it is taxable. If it is more, the excess can qualify for the £30,000 exemption.
Example
Sam is made redundant with three months’ contractual notice, which the employer does not ask Sam to work. Basic pay is £4,000 a month. The employer pays a lump sum of £40,000 plus £1,500 of accrued holiday pay.
| Element | Amount | Treatment |
|---|---|---|
| Holiday pay | £1,500 | Taxed and Class 1 NI as earnings |
| Post-employment notice pay (3 × £4,000) | £12,000 | Taxed and Class 1 NI as earnings |
| Remaining termination payment | £28,000 | Within the £30,000 exemption, tax-free |
If the lump sum had been £50,000, £38,000 would be the termination payment: £30,000 tax-free and £8,000 taxable, with £1,200 of employer Class 1A NI.
Statutory redundancy pay
Employees with at least two years’ continuous service who are made redundant are entitled to statutory redundancy pay, based on age and service:
- half a week’s pay for each full year under age 22
- one week’s pay for each full year aged 22 to 40
- one and a half weeks’ pay for each full year aged 41 or over
Service is capped at 20 years and weekly pay at £751 for redundancies on or after 6 April 2026, so the maximum is £22,530. Statutory redundancy pay is always within the £30,000 exemption.
Paying termination payments through payroll
- Payments made before the employee’s P45 is issued go through the final payroll with their normal tax code.
- Payments made after the P45 is issued must be taxed using code 0T on a non-cumulative basis, which can over-deduct tax. The employee can reclaim any overpayment from HMRC after the tax year.
- Payments above £30,000 are reported on the Full Payment Submission, with employer Class 1A paid through payroll.
Pension contributions
Part of a termination payment can be paid into a registered pension scheme as an employer contribution, which is free of Income Tax and NI, provided it is within the employee’s annual allowance (£60,000 in 2026/27, with carry forward). This can be valuable for employees whose package exceeds £30,000.
Settlement agreements
Most negotiated exits use a settlement agreement, which must set out the payments and their tax treatment. The employee must receive independent legal advice for it to be valid, and employers often contribute towards the legal fees. The agreement does not change the tax rules: HMRC looks at what each payment is actually for.
Frequently asked questions
Is redundancy pay taxable?
Statutory and enhanced redundancy pay are tax-free up to £30,000 in total. Amounts above £30,000 are taxed, but no employee National Insurance is due.
Is payment in lieu of notice taxable?
Yes. Pay in lieu of notice and post-employment notice pay are taxed and subject to National Insurance as normal earnings.
Is holiday pay on leaving taxable?
Yes. Accrued holiday pay is earnings and is taxed and subject to National Insurance in the normal way.
What is the maximum statutory redundancy pay in 2026?
£22,530 for redundancies on or after 6 April 2026, based on a weekly pay cap of £751 and up to 20 years’ service.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.