Hundred Summers

Redundancy: the tax playbook

The £30,000 exemption, what PILON really is, why the excess lands in your worst tax year, and the pension move that can save 40–60% — the decisions that must be made before the settlement agreement is signed.

Redundancy compresses a decade of tax planning into a few weeks, decided while you have other things on your mind. The rules themselves are short; the money turns on applying them before the settlement agreement is signed, because afterwards nothing can be restructured.

The three piles

Every termination package splits into three. Genuine termination pay — statutory redundancy plus enhanced or ex-gratia amounts — enjoys the £30,000 exemption, and none of it bears employee National Insurance at any level. PILON and holiday pay are ordinary salary since 2018: fully taxed and NI'd, never able to use the exemption, whatever the paperwork calls them. And the excess over £30,000 is taxable income in the year of payment — stacked on top of every pound of salary already earned that year.

The stacking problem

That stacking is why redundancy tax feels brutal: a £70,000 package landing after eight months of a £60,000 salary puts £40,000 of excess on top of £40,000 already earned — deep into higher rate, and a bigger package crosses £100,000, where the personal-allowance taper makes each pound cost ~60%. The month of payment also usually applies an emergency tax code, over-withholding tax you reclaim later — plan cash flow on the real bill, not the first payslip. The free redundancy calculator computes it on the actual band functions.

The pension move

The excess over £30,000 can often be paid by your employer directly into your pension instead of to you — an employer contribution, never touching your income. For someone in the 40–60% zone this is the best-relieved pension contribution most people ever have access to, limited by the £60,000 annual allowance plus carry-forward from three prior years. Two cautions: it must be agreed before payment, and if you then need to draw on that pension during the gap, the MPAA waits on the other side.

Education, not advice. Settlement agreements mix the three piles in ways that change the tax, and you'll usually have legal advice as part of signing — have the tax split checked at the same time. For a personal recommendation speak to an FCA-regulated financial adviser; free impartial guidance is available from MoneyHelper.

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Hundred Summers. Education, not regulated financial advice; projections and results are illustrations, not guarantees.
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