Working for an employer Tax-free lump sums
Lump sums for redundancy are usually tax-free
Extra payments, such as bonuses, from your employer are normally treated as salary and taxed in the normal way. Some lump-sum payments are tax-free however. These include:
- Money your employer pays into a registered pension scheme or uses to buy an annuity for you.
- Most lump sums from a registered employer’s pension scheme, including death benefits paid to your dependants.
- Pension gratuities you receive on leaving the armed forces.
- The first £30,000 of most redundancy payments.
- Compensation paid by your employer if they break your contract, but not pay in lieu of notice if it is part of your contract or customary.
- Compensation for an injury or disability that means that you are unable to continue with your job.
- Suggestion scheme awards under formal schemes and up to a maximum £25 if your idea is not adopted, or £5,000 if it is.
- Relocation expenses up to a maximum of £8,000.
A genuine personal gift from your employer – for example, on getting married – is also tax-free, but the onus will be on you to show that it really was personal and not as a result of your being an employee.
If there is no income tax on a lump sum you receive, normally there will be no National Insurance contributions either.
- For any tax query, call our experts on the Which? Money Helpline
- Take a look at our guide to your rights if made redundant
- See our guide to tax rates, allowances and amounts
