You may have seen recent reports that Jaguar Land Rover (JLR) are cutting up to 4,000 jobs, many of which will affect the company’s West Midlands based head office. According to the BBC, the reasons for the redundancies are Chinese competition, US tariffs and the shift that many car manufacturers are making to electric vehicles.
Sadly though, JLR isn’t alone in announcing thousands of job losses. Some of Britain’s largest employers, including Virgin Media, Sainsbury’s, Barclays and Whitbread have said they will be laying off thousands of employees to cut costs.
Interestingly, an article by the Telegraph reveals that highly paid executives could be most likely to be made redundant. If you’re one of them or think you might be at some point in the future, you may be wondering how redundancy payouts are taxed, and whether contributing it to your pension is a good idea.
Read on as we answer some commonly asked questions about redundancy payments.
Do I pay tax on my redundancy?
Generally speaking, the first £30,000 of your redundancy pay is deemed to be free from Income Tax or National Insurance Contributions (NICs). Any amount above this threshold, or classed as Payment in Lieu of Notice (PILON), holiday pay, or a bonus, could be liable to both deductions.
PILON is a lump‑sum payment that’s made if your employer doesn’t want you to work your notice period. As it represents the wages you would have earned during your notice period, it’s treated as earnings.
This means PILON is typically liable to Income Tax and NICs. If, for example, your redundancy package comes to £40,000 and includes a £15,000 PILON payment, only £25,000 would be tax-free.
It’s important to remember that if your PILON payment, bonus, and holiday pay pushes you into a higher-rate tax band, you may be liable to pay a larger tax charge than you initially thought.
What element of my redundancy can I place into my pension?
Any part of your redundancy that’s made up of salary, PILON or holiday pay can be paid into your pension and receive tax relief as it’s classed as ‘relevant earnings’. That said, any amount you contribute will be subject to your Annual Allowance, which is the amount of money you can place into your pension during a tax year that receives tax relief.
In 2026/27, the allowance is restricted by your total (taxable) earnings in a single tax year, and exceeding it could result in a significant tax charge. If you’re a high earner or are taking an income from a Defined Contribution pension, your Annual Allowance could drop to just £10,000.
If you’re thinking of making a significant contribution that could exceed your Annual Allowance, it’s worth speaking to your adviser before you go ahead. They can explain the potential consequences of doing so and help you understand the alternatives that may be available to you.
Can I pay the first £30,000 of my redundancy into my pension?
Broadly, the answer is no. The reason for this is that the first £30,000 of a bona fide redundancy payment is not classed as relevant earnings. Typically, pension contributions can only be made from relevant earnings, which include:
income from employment (including wages, bonus, overtime or commision)
self-employed income
taxable benefits in kind
profit related pay
statutory sick pay.
Please note that this is not a complete list for relevant earnings. For more information visit the Government website.
Alternatively, you may be able to use salary sacrifice to place £30,000 of your earned income into your pension if you’re expecting to commence work with a new employer and where you are looking to minimise tax and maximise contributions.
Salary sacrifice is where you and your employer agree to reduce your earnings by a specific amount, which your employer then places into your workplace pension scheme. If your pension contributions exceed your Annual Allowance, it will be worth contacting your adviser to discuss your options.
What is the best way to pay my redundancy into my workplace pension?
If your employer is happy to pay the element of your redundancy that’s liable to tax into your pension before they deduct Income Tax or NICs, it will usually mean you won’t pay either of the taxes.
If the redundancy money has already been paid to you, you can still pay it into your personal pension scheme or Self Invested Personal Pension (SIPP). While this will mean you can claim tax relief on the Income Tax you paid on the payment (subject to your Annual Allowance), you won’t receive any relief on the NICs.
Can I be sure contributing to my pension is the best option?
Before placing some or all of your redundancy into your pension, consider your options carefully. For example, while putting it in your pension could provide tax benefits, it locks the money away until you reach Minimum Pension Age (MPA), which is currently 55 (rising to 57 after 6 April 2028).
As you cannot access the money in your pension pot until you reach MPA, it could cause financial difficulties if it takes longer than you expected to find employment. Not only could this create feelings of stress, it may also mean that you have to lower your standard of living to make ends meet.
If you’re thinking of putting your redundancy into your pension, it’s wise to make sure you have a financial buffer of 6-12 months readily available living expenses if you can. This will help to future-proof your lifestyle if you’re out of work for longer than expected.
Discussing your situation with a financial adviser is likely to be a shrewd move. They can explain your options in a clear and understandable way so that you can make a decision you won’t regret later.
What happens to my workplace pension after redundancy?
Any income that’s already been contributed to your pension is your money and therefore remains in your ownership. If you’re made redundant, your employer will stop paying into it, meaning you can:
leave it alone and let the pension provider manage your money until you retire
transfer your pension to a different arrangement, such as the scheme provided by your new employer
leave your pension where it is for now and transfer it later if you choose to do so.
If you do prefer to wait, be sure to check whether your new employer's pension provider has a time limit to transfer over your accrued benefits with your current scheme.
How can AFH Wealth Management help?
If you would like to discuss your redundancy package and the options available to you, please call us on 0333 010 0008, or arrange a no obligation initial meeting with one of our Independent Financial Advisers.
13 November 2026