Enhanced redundancy pay explained
Is enhanced or contractual redundancy pay tax-free? How it shares the £30,000 exemption with statutory redundancy, when it’s taxed, and how PENP can change the answer.
What is enhanced redundancy pay?
Enhanced redundancy, often called contractual redundancy, is redundancy pay your employer gives on top of the legal statutory minimum — for example a more generous number of weeks per year of service, no cap on weekly pay, or a flat extra sum. It's usually set out in your contract, a redundancy policy or a settlement agreement.
Is it tax-free?
Genuine enhanced redundancy is a termination award, so it qualifies for the £30,000 tax-free exemption — but it doesn't get its own £30,000. It shares one combined £30,000 with your statutory redundancy and any other genuine compensation:
- Add up statutory redundancy + enhanced redundancy + other genuine compensation.
- The first £30,000 of that total is free of Income Tax and National Insurance.
- Anything above £30,000 is taxed — Income Tax only, with no employee NI (your employer pays Class 1A NI on the excess).
When enhanced redundancy is taxed
There are two situations where some of it is taxed:
- The total goes over £30,000. The excess is added to your income and taxed at your marginal rate.
- Part of it is really notice pay. If you didn't work your full notice, HMRC's PENP rules can treat part of an enhanced or severance payment as notice pay and tax it as earnings (Income Tax and employee NI) — even below £30,000. See PILON and PENP explained.
Example
| Statutory redundancy | £10,000 |
| Enhanced redundancy | £27,000 |
| Total termination award | £37,000 |
| Tax-free (combined) | −£30,000 |
| Taxable | £7,000 |
The £10,000 statutory plus £20,000 of the enhanced pay are covered by the exemption; the remaining £7,000 is taxed at your marginal Income Tax rate, with no employee NI. Your employer pays Class 1A NI (15% in 2026/27 = £1,050) on that £7,000 — it isn't deducted from your pay.
Enhanced vs statutory redundancy
| Statutory | Enhanced | |
|---|---|---|
| Set by | The law | Your contract / policy |
| Uses the £30k exemption? | Yes | Yes (shared) |
| Employee NI over £30k? | No | No |
| Can become PENP? | No | Yes |
What to check
- Whether your settlement separates genuine redundancy from notice pay — only the redundancy part uses the exemption.
- Whether the combined termination award is over £30,000.
- The label doesn't decide the tax — “compensation” or “ex gratia” can still contain taxable notice pay.
For the full picture, read Tax on Redundancy Payments and use the redundancy pay calculator to estimate your take-home.
Sources — official UK figures
- GOV.UK — Redundancy: tax and National Insurance ↗
- GOV.UK — Calculate your statutory redundancy pay ↗
- HMRC — Relevant termination awards & PENP (EIM13874) ↗
Last reviewed June 2026 against official HMRC guidance · How we calculate →
Frequently asked questions
Is enhanced redundancy pay tax-free?
It can be. Genuine enhanced (contractual) redundancy is a termination award, so it shares the £30,000 tax-free exemption with your statutory redundancy and any other qualifying awards. The combined total up to £30,000 is tax-free; anything above is taxed.
Do I get a separate £30,000 for enhanced redundancy?
No. There is one combined £30,000 exemption across statutory redundancy, enhanced redundancy and other genuine compensation — not £30,000 for each.
Do I pay National Insurance on enhanced redundancy pay?
Not as the employee — even on the part above £30,000. Your employer pays Class 1A National Insurance on the excess instead. Employee NI only applies to the earnings parts of a package, such as salary, holiday pay and PILON.
Can enhanced redundancy be taxed even under £30,000?
Yes, if part of it is really notice pay. HMRC’s PENP rules can carve unworked notice out of an enhanced or severance payment and tax it as earnings before the £30,000 exemption is applied. Statutory redundancy itself is never reclassified this way.
Is contractual redundancy pay the same as enhanced redundancy?
Usually yes — “enhanced” and “contractual” redundancy both mean redundancy pay above the statutory minimum, typically set out in your contract or a redundancy policy. The tax treatment is the same: it’s a termination award that uses the £30,000 exemption.
How much tax will I pay on enhanced redundancy over £30,000?
The excess is added to your income and taxed at your marginal Income Tax rate (20%, 40% or 45%, or the Scottish rates), with no employee National Insurance. The exact figure depends on your total income for the year, so use the redundancy calculator.
See the take-home value of your redundancy package.
Redundancy pay calculator →