The tax on a termination payment is not a rate, it is an apportionment. Once a package is split correctly into the money that is earnings and the money that is compensation for losing the job, the tax follows automatically. Almost every surprise in this area comes from a package that was labelled one way and taxed the other, and the line that does it is nearly always the notice.
The 30,000 pound threshold, in the words of the Act
Section 403 of the Income Tax (Earnings and Pensions) Act 2003 says that a payment or benefit to which the section applies counts as employment income of the employee or former employee for the relevant tax year if and to the extent that it exceeds the 30,000 pound threshold. Two things follow. It is a threshold and not an allowance against the whole package, so only the excess is charged. And it is aggregated: section 403(4) requires other payments and benefits to be counted with it before the threshold is applied.
Is redundancy pay tax free?
Statutory redundancy pay falls inside the compensation side, and GOV.UK states the position in one line: statutory redundancy pay under 30,000 pounds is not taxable. It also notes that a termination payment may include statutory redundancy pay, holiday pay, unpaid wages and company benefits such as bonuses, and that what you pay tax and National Insurance on depends on what is in the package. Holiday pay and unpaid wages are earnings you had already earned, so they are taxed as earnings whatever else is in the same transfer.
Why the notice line decides everything
Money attributable to notice is earnings, whether it is paid by working the notice, by a contractual payment in lieu, or by an ex gratia sum that in substance replaces notice pay. That is the whole reason apportionment matters: an employer and employee cannot make a notice payment tax free by describing it as compensation. Compute the notice element first, from section 86 of the Employment Rights Act 1996 or the contract where it is longer, and the rest of the arithmetic falls out.
Ex-gratia payment rules and voluntary redundancy
An ex gratia payment is one the employer was not obliged to make, and in a termination it is usually the compensation for loss of employment that sits above the arrears and the notice. It is treated the same way as any other payment within the section: charged only to the extent the aggregate exceeds 30,000 pounds. Voluntary redundancy is no different: volunteering does not change the character of the payment, so the statutory element and any enhancement are apportioned exactly as they would be in a compulsory redundancy.
Tax on settlement agreements: taxed by their parts, never as a lump
A settlement agreement is a document, not a tax category, so asking whether settlement agreements are taxable has no single answer. The agreement should list arrears, notice and compensation as separate lines, and each is taxed on its own footing: arrears and notice as earnings, the compensation against the section 403 threshold. Where an agreement lumps everything into one figure, the apportionment still happens, it simply happens without your input, which is one of the practical reasons the independent adviser reads the document.
Questions people ask about tax on redundancy pay
Is the first 30,000 pounds of any redundancy payment tax free?
Only the parts that fall inside the section 403 charge, and only after aggregation. Holiday pay, unpaid wages and the notice element are earnings and are taxed regardless. GOV.UK puts it as statutory redundancy pay under 30,000 pounds not being taxable.
Is voluntary redundancy pay taxable?
It is treated exactly as a compulsory redundancy payment. Volunteering changes who initiated the departure, not the character of the money, so the same apportionment and the same 30,000 pound threshold apply.
Are settlement agreements taxable?
The agreement is not a tax category. Its parts are taxed separately: arrears and the notice element as earnings, the compensation element against the section 403 threshold.
What are ex gratia payments?
A payment the employer was not obliged to make. In a termination it is normally the compensation above the arrears and notice, and it falls within the section 403 charge, so it is taxed only to the extent the aggregate exceeds 30,000 pounds.
Is there a tax on redundancy pay calculator that gets the split right?
The split is the part a single-box tool gets wrong, which is why this page is the rule rather than a calculator. Money attributable to notice is earnings whether it is worked, paid in lieu or dressed up as an ex gratia sum, and only what is left counts against the 30,000 pound threshold in section 403. A tool that takes one headline figure and subtracts 30,000 from it overstates the untaxed part on any offer that carries pay in lieu of notice.
What does a redundancy pay tax calculator have to know before it can be right?
Three things, all of them apportionment rather than arithmetic. Which part of the package is notice, because that is earnings under section 86 or the contract where it is longer. Whether the remainder is genuinely compensation for loss of employment rather than arrears, holiday pay or a bonus, which are earnings you had already earned and are taxed as such. And that the threshold is aggregated under section 403(4), so other payments and benefits are counted with it before it is applied. A single total tells you none of that.