If you have to pay tax, it counts against your tax bill in the year you receive the money, not the year you were made redundant. If your redundancy payment is made by instalments, any unused balance of the £30,000 exemption can be carried forward and used against payments in a later tax year.
Your employer will deduct tax from your redundancy payment but the amount deducted will depend on when the payment is made.
If your employer makes the payment before you leave your job, the taxable portion above the £30,000 limit, along with any other amounts such as wages owed, will be included in your final pay and taxed using your normal tax code number.
If your employer makes the redundancy payment after your date of leaving, tax at the basic rate of 20% will be deducted. If you are a higher rate taxpayer you will need to pay any additional tax owing to HM Revenue and Customs. You can contact the Acas Helpline on 0330 331 0020 for advice about this.
Confusion can arise when your contract of employment says you are entitled to a certain period of notice, but your employer says you can leave immediately and gives you your wages for that period in one lump sum. Your employer might call this redundancy pay. However, this will not qualify for the £30,000 exemption as HMRC regard this as a payment of wages.
Tax is due on this in the same way as tax on any other wages payments and your employer will deduct tax and NICs in the normal way. Any statutory redundancy payment to which you may be entitled is in addition to this payment in lieu of notice. Statutory redundancy payments are tax free.
The redundancy payment is only taxable after the first £30,000. For more information, see the Low Incomes Tax Reform Group website.
Tax will also be charged on any compensation you win if you successfully sue your employer for failure to give you proper notice, or failing to pay some or all of your notice pay. You may be able to reduce your tax liability by paying some of your redundancy pay into a pension.