Financial Planning on Redundancy: A Complete Guide for Employees and Executives

Redundancy is one of the most financially significant events most employees will experience, and one of the least well-understood. The interaction between statutory redundancy pay, contractual entitlements, tax exemptions, pension contribution rules, and benefits continuity creates a complex set of decisions that must be made quickly — often while managing the emotional impact of losing a role.

This guide sets out the key financial planning considerations for employees and executives facing redundancy in the 2026/27 tax year, with particular attention to higher earners for whom the details matter most.

Statutory redundancy pay: the calculation

Statutory redundancy pay is calculated based on age, weekly pay, and length of service. As of 2026/27, the weekly pay cap is £751.

The multiplier applied to each year of service (up to a maximum of 20 years) is:

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

For example, an employee aged 45 with 12 years' service, earning £800 per week (capped at £751): 12 years × 1.5 × £751 = £13,518. Statutory redundancy is not taxable.

Most employers paying above the statutory minimum will include contractual or enhanced redundancy pay within the overall settlement, meaning the statutory element is often a floor rather than the final sum.

Ex-gratia payments and the £30,000 exemption

Payments made genuinely as compensation for loss of employment — rather than as payment for services — benefit from the first £30,000 being free of income tax and National Insurance. This exemption is one of the most valuable in the tax code for affected employees.

Above £30,000, ex-gratia payments are subject to income tax at the employee's marginal rate (40% or 45% for higher and additional rate taxpayers respectively). Employer National Insurance (15% from 6 April 2025) is also due on the excess over £30,000. Employee NI does not apply to termination payments.

Not all payments within a redundancy settlement qualify for the exemption. HMRC treats the following as fully taxable regardless of how they are labelled:

• Pay in lieu of notice (PILON): Since 6 April 2018, all PILON is fully taxable as employment income, even if there is no contractual PILON clause. The taxable amount is the "post-employment notice pay" (PENP), calculated on a statutory formula based on basic salary over the notice period.
• Accrued but unpaid holiday pay: Fully taxable.
• Bonuses or commission owed: Fully taxable.

The practical implication is that structuring discussions should focus on clearly distinguishing genuinely compensatory sums from payments in lieu of contractual entitlements.

Garden leave implications

Where an employer requires an employee to work out their notice period from home — garden leave — the employee remains on the payroll throughout. All payments during the garden leave period are fully taxable as employment income. There is no tax advantage to garden leave from the employee's perspective; it may, however, be preferable to PILON where the employee wishes to delay the formal end of employment for benefits continuity or pension purposes.

Garden leave also means the restrictive covenants in the employment contract remain in full force — the employee cannot join a competitor or solicit clients during the period. This can be important for senior executives planning their next move.

Negotiating the settlement

Redundancy settlements — formally recorded as Settlement Agreements under Section 203 of the Employment Rights Act 1996 — waive the employee's right to bring claims in the Employment Tribunal in exchange for financial consideration. For an agreement to be binding, the employee must receive independent legal advice (the employer typically pays a contribution towards solicitors' fees, usually £500–£750 plus VAT).

For higher earners, the negotiating room often lies not in the ex-gratia headline figure but in how the package is structured:

• Timing of payment relative to the tax year
• Outplacement support (not taxable, and often worth £5,000–£20,000)
• Continuation of benefits (private medical insurance, life cover) into a transition period
• Treatment of unvested share options or long-term incentive plan (LTIP) awards
• Reference wording

Executives with LTIPs, deferred share awards, or carried interest arrangements in particular should take specialist advice before signing, as the tax treatment of departing participants varies significantly between schemes.

SIPP contributions from redundancy pay

Where the redundancy payment includes taxable income (PILON, for example, or the ex-gratia element above £30,000), it is possible to contribute this to a Self-Invested Personal Pension (SIPP) and receive tax relief at the marginal rate.

Crucially, pension contribution relief is available on UK relevant earnings — and PILON, having been reclassified as earnings since 2018, qualifies. If your PILON is £50,000, you could contribute up to £50,000 to a SIPP (subject to the annual allowance, currently £60,000 for most individuals, plus any carry-forward from the previous three years) and reclaim 40% or 45% relief on contributions above the basic rate band.

The tax-free £30,000 exemption does not constitute "relevant earnings" for pension purposes — you cannot make pension contributions based on the exempt portion and receive relief.

Timing matters: the pension contribution must be made before the end of the tax year in which the redundancy income arises.

NI gaps and pension continuity during unemployment

A period of unemployment creates gaps in your National Insurance record, which can affect your State Pension entitlement. For the 2026/27 tax year, you need 35 qualifying years for a full new State Pension (currently £241.30 per week).

Where an NI gap arises:

• Jobseeker's Allowance (JSA) and Universal Credit generate NI credits automatically — each week claiming generates a credit.
• Voluntary NI contributions (Class 3): if you do not claim benefits, you can pay Class 3 NI voluntarily (around £910 per year for 2026/27) to protect your record. This is generally excellent value given the State Pension return.
• Check your NI record at GOV.UK — gaps from the past six years can typically be filled, and some older gaps may also be available to fill under transitional arrangements.

Private pension contributions can also continue during unemployment up to £2,880 net per year (the basic rate relief brings this to £3,600 gross), even with no earned income. This is a useful mechanism for maintaining pension contributions during a transition period.

Healthcare continuity

Employer-provided private medical insurance (PMI) typically ceases when employment ends. Options for continuity include:

• Continuation or portability schemes: many group PMI policies include the right to convert to individual cover without medical underwriting for a limited period after leaving employment. This is valuable if you have existing conditions that would otherwise be excluded.
• Individual PMI: available directly from insurers, with underwriting based on your medical history. Pre-existing conditions may be excluded.
• IPMI (International Private Medical Insurance): relevant for internationally mobile individuals who may not be based in the UK during the transition period.

The cost of private medical cover is substantial — typically £1,500–£4,000 per year for an individual depending on age and cover level — and should be included in transition budget calculations.

Immediate financial planning priorities

On receiving notice of redundancy, the following actions should be taken promptly:

1. Calculate the full financial package (statutory + enhanced + PILON + holiday pay)
2. Understand the tax position — get specialist advice before signing the Settlement Agreement
3. Review the pension position: remaining employer contributions, unvested benefits, and the SIPP contribution opportunity
4. Review your will and protection policies — particularly if life cover was through the employer
5. Plan your cash flow for the transition period: living expenses, tax liabilities, and any business expenditure if you are considering self-employment

Compliance note

Redundancy payment rules and tax treatment are complex and subject to legislative change. The £30,000 exemption, PILON rules, and SIPP contribution limits quoted above apply to the 2026/27 tax year and may change in subsequent Budgets. This guide provides general information only and does not constitute personal tax or financial advice. Always seek professional guidance tailored to your specific circumstances.

How Global Investments Can Help

Global Investments advises senior executives and professionals at major career transitions, including redundancy events that trigger complex tax, pension, and planning decisions. We can coordinate with employment law specialists, calculate the pension contribution opportunity within the statutory deadlines, and develop a financial plan for the transition period and beyond. Whether you are relocating internationally following redundancy or rebuilding your financial structure in the UK, our team brings the cross-border expertise to advise appropriately. Contact us to arrange a confidential initial discussion.