Last updated: 16 October 2026
Can you reclaim excess tax deducted from severance pay?
Yes, often. The first £30,000 of a genuine redundancy or termination payment is tax-free, but employers sometimes deduct tax on it, or deduct too much because a lump sum is taxed on an emergency or “0T” code. If you don’t start a new job in the same tax year, you’ll usually be owed a refund. You can claim through your HMRC personal tax account using form P50 if you’ve stopped working, or through Self Assessment if you file a return.
How severance pay is taxed
| Payment | Tax | NIC |
| Salary and holiday pay to leaving date | Taxable | Yes |
| Payment in lieu of notice (PILON) | Taxable (post-employment notice pay) | Yes |
| Statutory redundancy pay | Tax-free within £30,000 | No |
| Ex-gratia compensation | Tax-free up to £30,000 | Employer NIC above £30,000 |
| Amounts over £30,000 | Taxable | Employer Class 1A at 15% |
Why too much tax is deducted
- Payments after the P45 is issued are taxed on code 0T, with no personal allowance
- The employer taxed the whole payment, ignoring the £30,000 exemption
- The lump sum pushed you into a higher band for that pay period
How to claim a refund
- Check your payslip and P45 to see the tax deducted.
2. If you haven’t started a new job and won’t in the tax year, claim with form P50 online.
3. If you’ve started a new job, give the new employer your P45; tax should be corrected through PAYE.
4. Otherwise, claim at the end of the tax year through Self Assessment or a P800.
Example
Jane is made redundant in July 2026 and receives £40,000: £3,000 notice pay and £37,000 compensation. The £3,000 is taxable. Of the £37,000, £30,000 is tax-free and £7,000 is taxable. The employer pays it after her P45 on a 0T code, deducting 40% on much of it. As she doesn’t return to work until the next tax year, she claims a refund, with her personal allowance applied, and gets back several thousand pounds.
Pension contributions
You can ask your employer to pay part of a termination payment into your pension, which is tax-free and avoids the 0T problem, within your annual allowance.
Common mistakes
- Not checking whether the £30,000 exemption was applied
- Waiting until the next tax year to claim
- Forgetting that notice pay is always taxable
- Using form P50 while claiming taxable benefits such as jobseeker’s allowance, when the refund comes through the benefit office instead
Records to keep
Keep the settlement agreement, P45 and final payslips.
Settlement agreements
Most severance packages are paid under a settlement agreement, and the employer usually pays for independent legal advice, which is tax-free. Check the agreement says how each element will be taxed, and ask the employer to pay the compensation before issuing your P45 where possible, so your normal tax code applies.
Frequently asked questions
How long do I have to claim?
Four years from the end of the tax year.
Is redundancy pay taxed if I’m over State Pension age?
Same rules apply.
Do I have to tell HMRC about a severance payment?
Not if PAYE handled it correctly.
Can I claim if I’m self-employed afterwards?
Yes, through your return.
Related: recovering overpaid PAYE, claiming old tax refunds and tax refund delays.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with redundancy tax refund help. See our tax refund 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 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
