If you’re facing redundancy, one of the biggest concerns is often how much tax you’ll have to pay on your final payments. The good news is that not all redundancy payments are taxed the same way. Statutory redundancy pay can be tax-free up to a certain limit, while other payments like notice pay and bonuses are usually taxable. Understanding these differences helps you avoid surprises and plan your finances better during this tough time.

In this blog, we’ll explain the key distinctions between statutory redundancy pay, notice pay, and other termination payments, showing you what’s taxable, what’s exempt, and how HMRC treats each type of income. By the end, you’ll be better equipped to handle the tax implications of redundancy and protect your hard-earned money.

What Should Employees Know About Redundancy and Notice Periods?

If your job is at risk, it’s essential to understand how redundancy and notice periods work; they directly affect your final payout and how it’s taxed. Redundancy happens when your employer needs to reduce staff for legitimate reasons, such as business closure, restructuring, or a reduced need for your job role.

To qualify for statutory redundancy pay, you usually need at least 2 years of continuous year of service. The reason for redundancy must be genuine, and the process should be fair and legally compliant.

When redundancy applies, your employer must also follow rules about notice periods. You’re entitled to a legal notice period for redundancies based on your length of service:

Your contract may offer more generous terms. During this period, your employer might ask you to work, place you on garden leave, or provide payment in lieu of notice. Almost all notice pay, including PILON, is subject to redundancy notice period tax; exceptions are rare.

Read our guide on Redundancy pay zero hours contract.

How Much of a Redundancy Package Is Tax-Free?

If you’re facing redundancy, one of the first questions you’ll ask is: how much tax will I pay on my redundancy notice period pay? Here’s a simple breakdown to help clarify things:

• Notice period pay is treated as regular earnings, so it’s subject to income tax and National Insurance contributions just like your usual salary.
• Statutory redundancy pay is tax-free up to the legal limits; you don’t pay income tax or National Insurance on this part.
• Enhanced (non-statutory) redundancy pay may also be tax-free, but together with statutory redundancy pay and other qualifying termination payments, only the first £30,000 is exempt from tax.
• Any amount above the £30,000 tax-free threshold is subject to income tax and National Insurance.
• Holiday pay included in your final payment is treated as normal earnings and taxed accordingly.

Understanding how each part of your redundancy package is taxed helps you plan ahead, avoid unexpected tax bills, and make the most of your entitlements.

What Are Notice Period Payments and How Do They Work?

Your notice period affects both how you work and how you’re paid during redundancy. Whether you’re working notice, on garden leave, receiving paid notice, or getting payment in lieu of notice (PILON), these payments are treated as regular income and taxed accordingly.

• Working notice: You continue working and get paid as usual, with normal tax and National Insurance deductions.
• Garden leave: You stay off work but remain on payroll, still taxed like a regular salary.
• Paid notice: You’re paid for your notice period without working, taxed as regular income.
• PILON (Payment In Lieu of Notice): A lump sum payment instead of notice period work, treated as earned income and taxed through payroll.

Payment in Lieu of Notice (PILON): What Does It Mean?

It’s a lump sum your employer pays you when they decide not to have you work your notice period. Instead of staying on payroll during your notice, you’re paid upfront for that time. This amount usually includes your base salary and sometimes benefits that you would have earned during the notice period.

Although it may feel like an extra payment, PILON simply replaces your normal notice pay, and it’s fully taxable.

HMRC treats PILON as normal earnings, whether or not it’s mentioned in your contract. That means:

• It’s processed through payroll
• Income tax and national insurance are deducted
• You receive a net amount, just like a regular salary

If your contract contains a PILON clause, your employer is expected to make this payment when ending employment immediately. Even if there’s no clause, and your employer still chooses to pay you instead of having you work, it’s still treated as taxable income.

PENP (Post-Employment Notice Pay) is the amount HMRC calculates from your redundancy package. It’s not a formula itself but the result of applying a specific formula. So, PENP is the calculated figure, and the formula is the method used to find it.

How Is Redundancy Pay Taxed Compared to Notice Period Pay?

When your employment ends, it’s important to understand how taxation on redundancy pay works, because not all payments are treated equally. Here is a general overview of how redundancy pay and notice period pay are taxed in completely different ways, which can have a big impact on what you actually take home.

Here’s a clear comparison to help you make sense of it:

Enhanced redundancy pay offers some tax relief, but anything above £30,000 is taxed. Notice pay, whether worked or paid in lieu, is always treated as regular earnings – meaning income tax and National Insurance are deducted through PAYE.

To understand more about how employer deductions work for notice pay and redundancy, you can also check out this guide on UK employer payroll taxes.

What Factors Influence How Notice Pay Is Taxed?

How your notice pay is taxed depends on several important factors, such as whether you’re working your notice period or being paid in lieu, and how much your total income, including any social welfare payments, is for the year. These factors influence how much tax you pay and ultimately what ends up in your pocket. Understanding these details helps you avoid any unpleasant surprises on your final payslip.

Factors Influencing Notice Pay Taxation:

1. Determine Total Income:
   Your total income for the year plays a key role. If you have earned a significant amount or had multiple jobs, your tax rate might increase, potentially pushing you into a higher tax bracket. This affects how much tax is deducted from your notice pay.
2. Handle Notice Period:
   How your notice period is handled matters.

• If you’re working your notice, you receive your usual pay with tax and National Insurance (NI) deductions applied under normal contract terms.
• If you receive Payment in Lieu of Notice (PILON), a lump sum payment instead of working the notice, it’s still subject to the same taxation rules.

3. Check Contract Terms:
   Your employment contract can clarify the terms of notice pay and PILON. Even if PILON isn’t explicitly mentioned, HMRC treats any payment in lieu as fully taxable, so no tax exemptions apply.
4. Apply Tax Rules:
   Unlike redundancy pay, notice pay does not enjoy any tax-free allowances. All payments for your notice period are fully taxable income.
5. Calculate Tax Bracket:
   A large lump sum payment for notice might push you into a higher tax bracket, leading to increased tax deductions. It’s important to understand how this calculation impacts your overall tax bill.
6. Deduct Taxes:
   Your employer’s payroll team is responsible for deducting the correct amount of tax and NI contributions before paying you. This ensures compliance with HMRC rules.
7. Seek Clarification:
   If you’re unsure how your notice pay has been calculated or taxed, you have the right to request a breakdown or explanation. Clarifying this can help you understand your final payslip and ensure accuracy.

Confused About Tax on Notice Pay During Redundancy? We’ve Got You Covered

Wondering if notice period pay is tax-free in redundancy? It’s not, and getting it wrong can lead to costly mistakes. At Direct Payroll Services, we take the guesswork out of notice pay, ensuring every payment is processed correctly, taxed properly, and clearly shown on payslips.

Here’s how we make the process simple and reliable:

1. Fully compliant with UK employment law and HMRC guidelines
2. Accurate calculations for PAYE, umbrella, CIS, and zero-hours staff
3. Clear, stress-free payroll support for both employers and employees

Let us handle your notice pay the right way, get in touch today for expert help you can trust.

Conclusion

Understanding tax on notice periods during redundancy is key to managing finances. Notice pay is taxed differently based on how it’s received. Working through notice is taxed as regular income, while Payment in Lieu of Notice (PILON) is usually taxable too under the contract of employment. Identifying any tax-free elements in your redundancy package helps with smarter financial planning. Staying informed empowers you to make better decisions during this transition. For tailored support and to ensure you’re making the most of your entitlements, consider seeking professional advice.

Frequently Asked Questions

Are there situations where notice period pay is not taxed in redundancy?

Almost all notice period payments in redundancy are subject to income tax and processed through payroll, so it is essential to keep a record of receipt for these transactions. The only exceptions are very rare cases, such as summary dismissal without notice or pay, where no contractual or statutory notice is owed.

Can I reduce the tax paid on my notice period payment if I am made redundant?

Generally, notice pay is fully taxable as income. There are no exemptions or additional reliefs for this payment within a redundancy package. Tax relief or exemptions apply only to statutory redundancy and certain termination payments, not to the notice period.

Will notice pay impact the overall tax I owe on my redundancy package?

Yes, notice pay increases your total income for the year and may push you into a higher tax bracket. This can result in a larger overall tax bill, especially if combined with an enhanced redundancy package or other termination payments.

What parts of a redundancy package are exempt from tax, and does this include the notice period?

Only statutory redundancy pay and approved tax-free lump sums, as well as pension scheme payments and pension contributions, are exempt from tax for an individual’s income. Notice period payments, whether paid or worked, are never tax-free and are always subject to income tax and payroll deductions.