Taxation of redundancy payments

Taxation of redundancy payments

Do you have to pay tax on your redundancy pay?

Redundancy pay is compensation for the loss of your job and therefore qualifies for special tax treatment. Up to £30,000 of your redundancy pay is capable of being paid free of tax. This does not include other elements of your redundancy package, such as  accrued holiday pay and bonuses.

You will pay tax at your marginal rate once you cross over the £30k limit, and this is usually deducted by your employer at source. If not, you will have to account for the payment and any necessary tax in your tax return.

What about payment in lieu of notice (“PILON”). Does this have to be taxed? 

Whether or not your notice payment is taxable will depend upon your employment contract. If you have a pay in lieu of notice (“PILON”) clause in your employment contract, your employer is required to make tax and National Insurance deductions. If, however, your contract does not have a PILON clause, and your employer opts to pay you in lieu, this payment can come within the first £30,000 available tax free exemption.

Where there is a custom and practice by your employer to make a payment in lieu of notice, despite the absence of a PILON clause, HMRC may still determine that tax should be deducted, because of their custom and practice.