Redundancy and Career Transition: A Financial Planning Guide

Redundancy is one of the most financially significant personal events outside of death, divorce, or a major health event. Whether it comes as a surprise or has been anticipated, the financial decisions made in the weeks immediately before and after a redundancy can have lasting consequences. This guide covers the key planning considerations — from understanding what you are owed to making the most of your departure package.

What You Are Owed: Statutory and Enhanced Redundancy Pay

Statutory Redundancy Pay

UK employees with at least two years' continuous service are entitled to statutory redundancy pay, calculated on the basis of:

• Half a week's pay for each full year worked under the age of 22
• One week's pay for each full year worked between the ages of 22 and 40
• One and a half weeks' pay for each full year worked at age 41 or over

The weekly pay figure is capped — at £751 per week for 2026/27, subject to annual revision — and the maximum period of service used in the calculation is 20 years. The maximum statutory redundancy payment is therefore £22,530. This reflects policy, not practice: many employers pay significantly more.

Enhanced Contractual Redundancy

Your employment contract may provide for an enhanced redundancy package above the statutory minimum. Common structures include:

• One month's salary per year of service (uncapped or capped at a certain number of months)
• A multiplier above the statutory formula (e.g., two weeks' pay per year rather than one)
• Additional payments for long service or at managerial/director level

If your employer's redundancy policy is set out in your contract or in a staff handbook that forms part of your contractual terms, it is legally binding. If it is purely discretionary, it is not — though established practice can sometimes create a reasonable expectation in law. Legal advice from an employment solicitor is worthwhile if the amounts are significant or if there is ambiguity about what you are entitled to.

The £30,000 Exemption

The most important tax concept in redundancy planning is the £30,000 exemption. The first £30,000 of a qualifying redundancy payment is exempt from income tax and National Insurance contributions. Above £30,000, the excess is treated as employment income in the year of receipt and subject to income tax at your marginal rate.

What Qualifies for the Exemption?

The exemption applies to statutory and enhanced redundancy payments. It also applies to other "ex gratia" payments made genuinely in connection with the termination of employment — for example, a goodwill payment above your contractual entitlement — provided they are not in lieu of notice or contractual.

What Does NOT Qualify

Not all elements of a departure package qualify for the £30,000 exemption. The following are always taxable as employment income:

Payment in lieu of notice (PILON): Since April 2018, all PILON payments are subject to income tax and National Insurance, regardless of whether the right to terminate with payment in lieu is set out in the contract. HMRC treats PILON as taxable post-employment notice pay (PENP). If your employer's contractual notice period is three months, the notional three months' salary is taxable, even if it forms part of a single lump sum settlement.

Garden leave: Salary paid during a period of garden leave is taxable employment income. You are still employed, merely not required to attend work.

Bonus payments: Outstanding or contractual bonus payments due to you are taxable employment income, not redundancy pay.

Holiday pay: Accrued but unused holiday is taxable employment income.

Structuring the settlement to maximise the proportion that falls within the £30,000 exemption requires care. Your employer's solicitors will be aware of the rules, but so should yours.

Settlement Agreements and Non-Disclosure

Many redundancies are concluded through a settlement agreement (formerly called a compromise agreement), which typically includes:

• A waiver of claims against the employer
• A confidentiality or non-disclosure clause
• The payment structure in full

Settlement agreement payments are subject to the same tax rules as above — there is no automatic exemption for settlement agreement payments beyond the £30,000 redundancy element. Payments described as being "without admission of liability" or "in full and final settlement" do not change the tax analysis, though in practice the allocation between heads of claim may offer some flexibility.

Payments in settlement of certain employment claims — for example, for discrimination or injury to feelings — have historically been treated differently and may be exempt from income tax in whole or in part. This area is nuanced and the HMRC position is not always straightforward. Specialist employment tax advice is recommended if significant sums are involved under these heads.

Your employer is required to ensure you take independent legal advice on any settlement agreement before you sign it. The cost of this advice is typically covered by the employer.

Redundancy and Pension Planning

Using Your Redundancy Payment to Fund Your Pension

The tax-free element of a redundancy payment (up to £30,000) is not "earned income" for pension purposes and therefore cannot itself be used to generate pension relief. However, you can make a pension contribution equal to up to 100% of your UK earnings in the same tax year. If you received a salary in the year before redundancy, that earnings figure determines your personal contribution capacity.

More valuably, your employer may — as part of the negotiation — agree to make an additional employer pension contribution in lieu of (or alongside) part of the taxable redundancy payment above £30,000. Employer pension contributions are not subject to the same earnings-linked restrictions on the employee side; they simply need to fall within the annual allowance. This can convert what would otherwise be taxable income into tax-free pension savings.

For example: if your total departure package is £80,000 and £30,000 qualifies for the exemption, the remaining £50,000 would be taxable income. If some or all of that £50,000 is instead paid as an employer pension contribution (subject to annual allowance rules), it avoids income tax and NI entirely.

This restructuring requires the agreement of your employer and careful legal drafting. It should be discussed before the settlement is agreed.

Carrying Forward Unused Annual Allowance

If you have unused annual allowance from the previous three tax years, you may be able to make larger pension contributions in the year of redundancy. This is a valuable planning opportunity that is time-limited — once a tax year passes, unused annual allowance from that year cannot be carried forward further.

Managing the Financial Gap

Building a 12–24 Month Reserve

If a new role or income source is not immediately secured, a substantial cash reserve is essential. The recommended approach is to maintain:

• Month 1–3: Immediate expenses from current cash or bank account
• Months 4–12: A liquid emergency fund (easy-access savings, short-duration bonds) covering 6–12 months of living costs
• Months 12–24: A secondary buffer if the career transition is expected to take longer

For senior professionals and HNW individuals, the right reserve period may be 12–24 months, reflecting the longer search process for roles at partner, director, or C-suite level.

Income Replacement

While you are between roles:

• Universal Credit is means-tested and typically not relevant at the HNW level
• Contribution-based ("New Style") Jobseeker's Allowance (if you have paid sufficient NI) pays up to £95.55/week (25 or over) for up to six months — a modest but real amount
• NI credits: While registered as seeking employment with DWP, you receive NI credits that count towards your State Pension entitlement. If you are in your 40s or 50s and have gaps in your NI record, these credits are valuable

Maintaining Pension Contributions

If you have been contributing regularly to a pension while employed and are now income-free, note that you can continue to contribute up to £3,600 gross per year (£2,880 net, with 20% tax relief added by HMRC) to a personal pension even with no earnings. This keeps pension saving active even during a gap year.

Outplacement Services

Many major employers include outplacement services as part of the redundancy package — career coaching, CV and interview preparation, networking support. If your employer has not offered this, it is worth raising in negotiation, particularly at the senior level where specialist outplacement firms (such as Lee Hecht Harrison or Right Management) can be valuable.

Outplacement services are a non-taxable benefit provided by the employer.

Negotiating Your Package

Redundancy is a negotiation. The statutory minimum is a floor, not a ceiling, and many elements of the package — the PILON structure, employer pension contributions, the period of garden leave, outplacement support, reference wording, IP arrangements — are potentially open to negotiation. Engaging an employment solicitor before entering negotiations is advisable; the incremental cost of good advice is typically a small fraction of the additional value recoverable.

Emotional and Psychological Considerations

Financial planning for redundancy exists within a wider personal context. For many professionals, career is closely tied to identity, structure, and social connection. Redundancy — particularly if unexpected — can be disorienting.

Practical steps that help maintain financial and personal stability during a career transition:

• Maintain a structured routine with clear daily goals
• Review household budget promptly and identify areas for temporary reduction
• Keep investment portfolios under review but avoid reactive changes driven by anxiety
• Engage professional advice early rather than deferring difficult decisions
• Communicate openly with a partner or family about the financial position and expected timeline

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This guide is for general information only. Tax rules on redundancy payments are detailed and change over time. HMRC guidance should be consulted, and specialist tax and employment legal advice sought for any departure package above straightforward statutory redundancy. National Insurance and benefit entitlements are subject to frequent change; check current rates at gov.uk.

How Global Investments Can Help

Global Investments can assist individuals navigating a career transition, from reviewing the financial implications of a departure package to building a financial plan for the period ahead. We can model income replacement scenarios, advise on pension contribution strategy, review investment portfolios in light of changed circumstances, and introduce specialist employment solicitors where appropriate. Whether you are planning a redundancy negotiation or managing the aftermath, contact us to discuss how we can help.