Last updated: 14 October 2026
Can you divert part of a redundancy payment to reduce tax?
Yes. The most effective way is to ask your employer to pay part of your taxable redundancy package straight into your pension before it’s paid to you. Employer pension contributions aren’t taxed as income and have no NIC, so the amount above the £30,000 tax-free limit can be sheltered. You can also make a personal pension contribution after receiving the money and claim tax relief, within your £60,000 annual allowance and limited to 100% of your earnings for the year.
How redundancy pay is taxed
| Element | Tax treatment |
| Statutory and non-contractual redundancy, first £30,000 | Tax-free |
| Redundancy over £30,000 | Income tax, no employee NIC |
| Pay in lieu of notice (PILON) | Fully taxed as earnings, with NIC |
| Holiday pay, bonus, final salary | Taxed as earnings |
| Employer contribution to your pension instead | Tax-free, within annual allowance |
| Excess over £30,000 | Employer Class 1A NIC at 15% on this element |
Options to reduce tax
- Employer pension contribution: agree it in the settlement before payment
- Personal pension contribution: you pay in from the payout; relief at source adds 20%, and higher rate relief is claimed through your return
- Carry forward: unused annual allowance from the previous 3 tax years can be added
- Timing: if the payment comes near the end of the tax year, moving it after 5 April may help if your income next year is lower
Example
Lisa is made redundant with a £50,000 package: £5,000 PILON and £45,000 redundancy. The PILON is taxed as pay. Of the £45,000, £30,000 is tax-free and £15,000 is taxable. Her salary up to leaving is £40,000, so the £15,000 would be taxed partly at 40%. She asks her employer to pay £15,000 into her pension instead. That saves around £5,000 in tax and the employer saves Class 1A NIC.
Annual allowance
The annual allowance is £60,000 for 2026/27, reduced for high earners by the tapered allowance. Personal contributions also need you to have relevant UK earnings at least equal to the contribution. Redundancy pay above £30,000 isn’t relevant earnings, so for personal contributions use salary and PILON.
Money Purchase Annual Allowance
If you’ve already taken flexible pension income, the MPAA of £10,000 limits further contributions.
Common mistakes
- Agreeing a settlement before asking about pension contributions
- Assuming PILON is part of the tax-free £30,000
- Exceeding the annual allowance
- Forgetting to claim higher rate relief
Records to keep
Keep the settlement agreement, P45 and pension contribution statements.
Negotiating the settlement
Raise the pension option early, as employers usually agree to it because it saves them employer NIC on the excess. The settlement agreement should state the amount being paid into the pension, the scheme details and the date. If your employer refuses, a personal contribution from the payout can still achieve most of the saving.
Frequently asked questions
Do I pay NIC on redundancy?
Not on genuine redundancy pay.
Can I claim back emergency tax on my payout?
Yes, through form P50, P53Z or your return.
Is enhanced redundancy taxable?
The total over £30,000 is.
Can the employer pay into my ISA?
No, that would be taxed.
Related: UK tax on a payout, higher rate pension relief and compensation for a work injury.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with redundancy tax planning. 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 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
