Redundancy Payments: Understanding the Tax and NIC Rules

Redundancy payments are not always tax-free in the UK. While the first £30,000 of a genuine termination payment may qualify for tax relief, most redundancy and settlement payments are now partially or fully taxable and subject to National Insurance. Employers must carefully assess each component of the payment under HMRC’s complex redundancy tax rules to avoid penalties and unexpected liabilities.

With the UK economy facing slow growth, rising costs, and higher employer National Insurance rates from April 2025, many businesses are reviewing staffing levels and planning redundancy programmes. However, when making redundancy or termination payments, employers can no longer assume that the first £30,000 will be tax-free — that general rule has long changed.

Redundancy payments in the UK are now governed by intricate HMRC tax and NIC rules, which determine how each element of a payment should be treated. Failing to apply these correctly can expose businesses to unpaid liabilities, penalties, and reputational risk.

Since 2018, payments made on termination of employment have been defined as Relevant Termination Awards (RTAs). Employers must calculate the Post-Employment Notice Pay (PENP) — a complex formula that essentially determines how much of the termination payment represents pay for unserved notice. Depending on the outcome:

If the PENP equals or exceeds the full termination payment, the entire amount is taxable and subject to both income tax and employee NIC under PAYE.

If PENP is lower, any excess may qualify for the £30,000 tax-free exemption — but only if no other tax rules apply.

Any payment above the £30,000 threshold becomes taxable again and subject to Class 1A NICs (paid by the employer only).

However, qualifying for the £30,000 relief is not automatic. The source and purpose of each payment element must be examined. For instance:

Payments tied to new restrictive covenants in a settlement agreement are taxable.

Payments near retirement age may be treated as pension lump sums, potentially attracting tax up to 45%.

Salary sacrifice or pension contributions linked to termination are added back into PENP calculations.

Overseas employees may be eligible for different reliefs, while those returning as consultants or via personal service companies face separate PAYE/NIC risks.

In cases of ill health, termination payments may be fully exempt from tax and NICs.

The complexity can be staggering — there may be over 60 different data points to assess in a single redundancy payment calculation. Once an employee has left, correcting errors becomes difficult and costly. That’s why HMRC expects employers, especially those under the Senior Accounting Officer (SAO) regime, to demonstrate strong compliance controls and proper documentation.

To avoid pitfalls, it’s essential for employers to calculate the tax and NIC position early in the redundancy process, ideally before finalising settlement agreements. Getting it right ensures fair treatment for employees and protects the business from penalties or unexpected costs.

Conclusion:

Redundancy and termination payments are far more complex than they appear. The old £30,000 tax-free assumption rarely applies in full — and each situation demands detailed analysis. To stay compliant and control costs, employers should seek specialist advice on redundancy payments and employment tax matters.

Get in touch with Naail & Co Chartered Certified Accountants & Tax Advisors for tailored guidance on redundancy payments, tax efficiency, and compliance with HMRC rules.