Last updated: 14 October 2026
How does redundancy affect your Personal Savings Allowance and tax on interest?
Redundancy can change how much tax you pay on savings in two ways. First, the first £30,000 of a genuine redundancy or termination payment is tax-free, but any excess is taxable income and can push you into a higher tax band, which cuts your Personal Savings Allowance from £1,000 to £500. Second, if you’re out of work for a while, your lower income may let you use the £5,000 starting rate for savings, so much more of your interest can be tax-free.
Savings allowances in 2026/27
| Your position | Tax-free savings interest |
| Total income under £17,570, with other income within £12,570 | Up to £5,000 starting rate, plus £1,000 PSA |
| Basic-rate taxpayer | £1,000 PSA |
| Higher-rate taxpayer | £500 PSA |
| Additional-rate taxpayer | £0 |
The £5,000 starting rate is reduced by £1 for every £1 of non-savings income above your Personal Allowance.
How redundancy pay is taxed
| Payment | Tax treatment |
| Statutory and enhanced redundancy pay, first £30,000 | Tax-free |
| Termination payment above £30,000 | Taxed as income; no employee NIC; employer pays Class 1A NIC |
| Payment in lieu of notice and holiday pay | Taxed as normal earnings through payroll |
| Pension contributions from the employer as part of the deal | Usually tax-free, within allowances |
Example
Hannah earned £30,000 before being made redundant in June 2026, receiving £36,000 of redundancy pay. Her salary to June was £7,500. Of the payment, £30,000 is tax-free and £6,000 is taxable. With no other earnings for the rest of 2026/27, her non-savings income is £13,500. She has £40,000 of savings earning £1,800. Her starting rate is £5,000 less £930 (£13,500 − £12,570), so £4,070, and she has the £1,000 PSA. So all £1,800 of interest is tax-free. In a normal working year, she’d have paid 20% on £800.
Paying the redundancy money into a pension
If your payment is over £30,000, ask your employer before it’s paid whether part of the excess can go straight into your pension as an employer contribution. This avoids income tax on that part and isn’t limited by your earnings, though it counts towards your £60,000 annual allowance.
Claiming back overpaid tax
If you stop work and don’t start a new job in the same tax year, you may have overpaid PAYE. Claim back with form P50, or wait for HMRC’s end-of-year calculation.
Timing matters
If you can choose when you leave, a payment received early in a tax year, followed by months without work, often uses lower tax bands than one received just before 5 April after a full year’s salary. Your total income for the year decides your band and your savings allowance.
Benefits and redundancy money
If you claim means-tested benefits such as Universal Credit, savings over £6,000 reduce your award and savings over £16,000 usually stop it. A redundancy payment you save can therefore affect what you get.
Frequently asked questions
Does redundancy pay count as savings income?
No, it’s employment income.
Should I put redundancy money in an ISA?
It can protect future interest from tax.
Will Jobseeker’s Allowance affect my tax?
Contribution-based JSA is taxable.
Can I claim the Marriage Allowance?
Yes, if your income falls below your allowance.
Related: diverting redundancy pay to reduce tax, using your cash ISA allowance and savings interest and your tax code.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with tax after redundancy. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
