What should I do with redundancy pay?

The first £30,000 of a redundancy payment is free of income tax, counting statutory redundancy pay, any extra severance and non-cash benefits together.

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Pay for your notice period, holiday pay, unpaid wages and bonuses are taxed in full. Part of the payment can go into a pension, and the route you use decides the tax.

The advisers for this subject: Sunny Bharj and Tony Springer

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Statutory redundancy pay

Who qualifies: Employees with two years or more of service with their current employer.
Under 22: Half a week's pay for each full year you worked while under 22.
22 to 40: One week's pay for each full year you worked at those ages.
41 and over: One and a half weeks' pay for each full year you worked from 41.
The limits: Weekly pay is the average over the 12 weeks before your notice and is capped at £751. Service is capped at 20 years, so the most you can receive is £22,530. These apply from 6 April 2026.
Northern Ireland: Sets its own limits, published on nidirect.

Your employer can pay more than the statutory amount. The tax on the whole payment is worked out the same way.

How a redundancy payment is taxed

The first £30,000 is free of income tax. Statutory redundancy pay, any extra severance and non-cash benefits are added together for the limit.
Above £30,000 the rest is taxed as income. Your employer pays Class 1A National Insurance on that part.
Some pay is taxed in full, with National Insurance: unpaid wages, holiday pay, bonuses, payments for a restrictive covenant, and pay for any part of your notice period you do not work, known as post-employment notice pay.

Paying redundancy pay into a pension

Through your employer: If your employer agrees to pay part of the termination payment straight into a registered pension scheme, there is no income tax on that part. It counts toward your £60,000 annual allowance, and anything above the allowance is taxable.
From your own account: Tax relief on your own contributions is limited to 100% of your relevant UK earnings for the tax year. Your salary up to leaving counts. The first £30,000 of a redundancy payment does not, and the part above it does.
Unused allowance from earlier years: You may be able to carry forward annual allowance you did not use in the previous three tax years.
If you have already drawn from a pension: Taking taxable money flexibly from a defined contribution pension sets a money purchase annual allowance of £10,000 a year for future defined contribution saving. When the money purchase annual allowance applies

While you decide

Redundancy is one of the life events for which the FSCS protects a temporary high balance, up to £1.4 million for six months from when the money is paid to you. The standard £120,000 per person at each bank applies after that.

If the payment has to cover your costs until you find other work, set that amount aside in an instant access account before deciding on the rest. How much cash should I keep?

The first £30,000 of a redundancy payment does not count as relevant UK earnings, so it does not raise what you can pay into a pension yourself with tax relief.

Where this fits

Bring your redundancy letter and the breakdown of the payment to the first conversation, before the payment date if you can.

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The advisers for this subject

Sunny Bharj

Independent Financial Adviser

Tony Springer

Independent Financial Adviser

Advising through Equity & General Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. Check the firm on the FCA register under number 474163.