Making the Most of Redundancy: The Pension Opportunity

Redundancy is rarely welcome. The disruption to income, routine, and professional identity can be significant, and the financial planning response — in the immediate shock of the announcement — often falls far short of what is possible.

Yet for those with the financial flexibility to think clearly in difficult circumstances, redundancy can present a genuine planning opportunity. The combination of the tax-free redundancy allowance, a potentially lower-income tax year, and the availability of pension carry forward can make the year of redundancy an unusually efficient moment to make pension contributions.

This guide explains how redundancy interacts with pension planning, the tax treatment of redundancy payments, and the particular considerations for those made redundant while working overseas.

Important: This guide is for general educational purposes only. Tax and pension rules are complex and individual circumstances vary considerably. You should seek advice from a qualified financial adviser and a qualified tax adviser before making pension contribution decisions connected with redundancy. Rules on relevant UK earnings and annual allowance interactions require careful individual assessment.

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The Statutory Redundancy Payment and Tax

The first £30,000 of a redundancy payment is generally free of income tax and National Insurance. This tax-free treatment covers:

• Statutory redundancy pay (the minimum legal entitlement based on age, weekly pay, and years of service)
• Any additional contractual or ex-gratia payment the employer makes, up to the combined £30,000 threshold

Amounts above £30,000 are subject to income tax (at the individual's marginal rate) and, where applicable, employee National Insurance.

What redundancy pay is not: it is not "relevant UK earnings" for pension contribution purposes. This is a critical distinction. Pension tax relief (and the limit on how much you can contribute with tax relief) is based on relevant UK earnings — broadly, employment and self-employment income actually earned during the tax year. Redundancy pay, being compensatory rather than earnings, does not count towards this figure.

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Pension Contributions in the Redundancy Year: The Rules

In the tax year in which you are made redundant, you will typically have received salary up to the date of redundancy. That salary — and any other qualifying employment income in the year — constitutes your relevant UK earnings for that tax year.

You can contribute up to 100% of your annual relevant UK earnings to a registered pension scheme in a tax year (subject to the annual allowance cap of £60,000, or lower if you are subject to the tapered annual allowance). The tax relief on the contribution is capped at the same 100% of earnings figure.

Example: You earn £80,000 from April to October (seven months), then are made redundant. Your relevant UK earnings for 2026/27 are £80,000. You can make a personal pension contribution of up to £80,000 (limited by the annual allowance to £60,000). If you have unused carry forward from prior years, you can contribute more than £60,000.

The redundancy payment itself does not add to your earnings base. If you receive a £40,000 redundancy package (£30,000 tax-free + £10,000 taxable), you cannot contribute that £40,000 to a pension using the redundancy payment as the earnings justification. The earnings base remains your actual employment income.

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Carry Forward: Amplifying the Redundancy Year Contribution

Carry forward allows you to add unused annual allowance from the previous three tax years to the current year's allowance. If you had a high income in prior years and did not maximise pension contributions, you may have accumulated significant unused allowance that can be deployed in the redundancy year.

Key conditions for carry forward:

• You must have been a member of a registered pension scheme in each year from which you are carrying forward (deferred membership counts)
• The unused allowance is the annual allowance for that year (potentially tapered if you were a high earner) minus the pension contributions actually made in that year
• You cannot carry forward from years more than three years ago

Example: A senior executive made redundant in October 2026. In the three prior tax years, they maximised contributions partially:

• 2023/24 (AA £60,000): contributed £20,000. Unused: £40,000
• 2024/25 (AA £60,000): contributed £30,000. Unused: £30,000
• 2025/26 (AA £60,000): contributed £15,000. Unused: £45,000

Available in 2026/27: £60,000 (current) + £40,000 + £30,000 + £45,000 = £175,000. However, the contribution is capped at 100% of relevant UK earnings for the year. If earnings were £95,000, the maximum contribution is £95,000.

This is a powerful opportunity: in a year of lower-than-normal income (due to mid-year redundancy), deploying multiple years' carry forward into the pension may reduce the overall tax liability on the year's income while securing a large pension contribution.

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The Tax Efficiency of the Redundancy Year

There is a common misconception that you should always maximise pension contributions in high-income years and save less in lower-income years. In terms of maximising the relief available, this is generally correct. But the redundancy year introduces a specific opportunity worth examining carefully:

Income in the redundancy year may be lower than a full working year. This means your marginal rate may be lower too — you might fall from the 45% to the 40% bracket, or from 40% to 20% or 0%. A pension contribution at 20% basic rate relief is less valuable in pure relief terms than one at 40% or 45%.

However, this analysis can be offset by several factors:

1. Carry forward is available from prior high-income years. Using carry forward effectively "reaches back" to deploy allowance from years when income was higher — but the relief is applied in the current year at the current marginal rate.

2. The personal allowance position. If the redundancy year results in income below £100,000, the full personal allowance is available — there is no taper erosion to consider.

3. Avoiding a tax spike from a large redundancy payment. If the taxable element of a redundancy package pushes income into a higher band, a pension contribution that offsets that income can be highly valuable.

4. Long-term pension growth. The tax relief received is secondary to the long-term value of placing additional capital into a pension where it grows free of tax. Even basic rate relief (20%) represents a 25% uplift on the net contribution.

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Pension Contributions After Redundancy with No Income

A frequently overlooked rule: if you have no relevant UK earnings in a tax year (for example, you are made redundant in April, receive a redundancy payment, and spend the full tax year unemployed), you can still make a pension contribution of up to £3,600 gross (£2,880 net, with the basic 20% rate relief added by the scheme).

This rule applies regardless of whether you are working or not, and regardless of your age (up to 75). It allows pension contributions to continue through career breaks, redundancy periods, and early retirement — albeit at a low level.

For those who use a career break following redundancy to pursue other interests or travel, maintaining minimum pension contributions through this period helps preserve NI contributions and pension momentum.

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The Employer Contribution Angle

Where redundancy is negotiated — and particularly in the case of voluntary redundancy — there may be scope to request that the employer makes an additional contribution to your pension as part of the redundancy settlement. Employer pension contributions:

• Do not count as earnings and are therefore not subject to income tax or NI (unlike a salary increase or contractual bonus)
• Do count towards the individual's annual allowance
• Are deductible for the employer as a business expense (subject to the "wholly and exclusively" test)

For a basic rate taxpayer, the advantage of an employer pension contribution over a cash redundancy payment is modest. For a higher rate taxpayer, the difference between a £50,000 additional pension contribution (costing the employer £50,000, arriving in the pension at full value) and a £50,000 cash payment (subject to 40% income tax and potentially NI) is substantial — roughly £20,000 in additional tax saved.

This type of negotiation is most effective where the individual is legally represented (by an employment solicitor) and the employer's HR and finance teams understand the mechanics. It is not unusual in senior executive redundancy packages.

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The Overseas Redundancy Situation

For UK nationals working overseas who are made redundant by an international employer, the pension implications are more complex:

UK residency and relevant UK earnings: Pension tax relief in a UK registered pension scheme (SIPP or other) requires relevant UK earnings. If you are overseas and your employment income is not subject to UK tax (because you are neither a UK resident nor employed on a UK contract), it may not constitute relevant UK earnings — even if you are a UK national.

However, UK Crown servants (civil servants, armed forces, diplomats) working overseas are generally treated as UK residents for tax purposes, so their earnings are relevant UK earnings regardless of location.

QROPS holders made redundant: If you hold a Qualifying Recognised Overseas Pension Scheme (QROPS), redundancy does not affect the QROPS directly — it is independent of employment. The QROPS continues under its own rules.

Lump sum vs ongoing income: Where overseas redundancy packages include a significant lump sum, the tax treatment in the country of employment is the first question (and is outside the scope of this guide). Whether any proceeds can then be directed to a UK pension depends on the UK residency and earnings position.

Seek advice from a dual-qualified adviser with expertise in both UK pension rules and the employment law and tax law of the relevant jurisdiction.

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Practical Steps Following Redundancy

1. Request written confirmation of your pension position from your employer. This should include confirmation that all employer contributions up to the date of redundancy have been paid.

2. Review the pension scheme rules on employer contributions. Some employer contributions vest only after a qualifying period. If you are made redundant before vesting, employer contributions may be returned — check the scheme rules.

3. Obtain a pension statement from your employer's scheme. The statement should confirm your current fund value and any protected benefits.

4. Consider consolidation. A redundancy moment is often a good time to review all pension pots from previous employers and consider whether consolidation into a single SIPP makes sense for ongoing management.

5. Model the carry forward opportunity. Ask an adviser to calculate how much unused annual allowance you have available from the previous three years and whether deploying carry forward in the redundancy year is optimal.

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How Global Investments Can Help

At Global Investments, we work with individuals facing redundancy — both in the UK and internationally — to ensure the pension and financial planning opportunities are understood and acted on before the tax year closes.

Our advisers can help you assess the pension contribution opportunity in your specific circumstances, model the interaction between redundancy pay, carry forward, and tax efficiency, and ensure your pension arrangements continue to serve your long-term financial planning goals through what is inevitably a period of transition.

Contact our team to arrange a consultation.