The number sticks in your head.
Someone in a meeting says "around forty-five thousand" and from that moment it's a real thing. It's six months of breathing room. It's the mortgage until Christmas. You've spent it in your head a hundred times before it ever arrives.
Then the payslip lands and it's thirty-four. And you sit there wondering whether you misheard, or whether you've been short-changed, or whether you've just done something very stupid.
You probably haven't. But nobody explained the bit that matters, so let's do it properly.
The £30,000 rule is true — it's just narrower than you think
The first £30,000 of a genuine redundancy payment is free of income tax and free of National Insurance. That part is completely correct.
The catch is the word genuine. The exemption only covers compensation for losing your job. It does not cover money you were owed anyway for working, or for notice, or for holiday you never took.
And that's the whole problem — because your "package" is not one payment. It's several, sitting in a single line on a payslip, taxed in completely different ways.
What actually falls inside the £30,000
Your statutory redundancy pay. Any enhanced or contractual redundancy pay on top of it. Ex gratia payments made purely as compensation for the dismissal.
Add those together. That total is what gets measured against £30,000.
What is taxed in full, every time
Pay in lieu of notice. All of it. This is the one that catches almost everybody. Since 2018 it makes no difference whether your contract mentions PILON or not — HMRC works out what you'd have earned in your notice period and taxes that amount as normal earnings, with National Insurance on top. There's no route around it.
Accrued holiday pay. Fully taxable. You earned it by working, so it's treated like wages.
Outstanding wages, commission and bonuses. Same. Taxable in the usual way.
So take that £45,000. If £12,000 of it is three months' notice and £3,000 is untaken holiday, then only £30,000 is compensation. The £15,000 is taxed as normal pay — and that's before anything else comes off.
What happens above the line
Anything over £30,000 is taxed at your marginal rate. Only the excess, though — the first £30,000 stays protected.
There's one small mercy: you don't pay employee National Insurance on the excess. Your employer pays their share on it, but you don't.
Why you were probably taxed too much
Big one-off payments confuse PAYE. The system looks at a single enormous month and assumes you'll earn that every month for the rest of the year, so it taxes you as if you're on a far bigger salary than you are. Emergency and month-one tax codes make it worse.
If you leave partway through the tax year and don't work again for a while, your actual income for the year will be much lower than PAYE assumed. You have very likely overpaid.
You can claim it back. If you're not going back to work in the same tax year, HMRC's form P50 lets you reclaim without waiting. Otherwise it usually washes out through a P800 calculation after April, or when a new employer picks up your tax code. Either way, check — this is frequently four figures.
The one move worth making before you sign
If your package pushes you over £30,000, ask whether some of the excess can be paid directly into your pension instead.
Employer contributions to a registered pension scheme aren't measured against the £30,000 limit and aren't taxed as income. If you're anywhere near £100,000 of total income for the year — where the personal allowance starts disappearing and the effective rate hits 60% — this can be worth thousands.
It's the single most valuable thing on this page, and it only works before the money is paid. Once it's in your bank account, it's too late.
What to ask for right now
Ask HR or payroll for a written breakdown by element. Not a total — a breakdown. How much is redundancy compensation, how much is notice, how much is holiday, how much is anything else.
Check the redundancy element against what you're actually owed. Check the notice figure against your contract. Then you'll know whether the number in your head was ever realistic, and whether what arrived was right.
I'd add one honest caveat: if the sums are large or your circumstances are complicated, this is worth an hour with an accountant or a financial adviser. That's not a brush-off — it's usually the best money you'll spend all year.
Full plain-English guide to redundancy and tax: myredundancyrights.co.uk/faq