tax-free personal allowance Archives

If you’ve recently lost your job and are wondering how tax refunds on redundancy payments work and are considering claiming back tax you may have overpaid, you’ve come to the right place. Being made redundant is a challenging time, both emotionally and financially. Amongst the many adjustments, understanding your tax position might feel like an unwelcome extra burden. However, here at Taxfile, we know that many individuals who experience redundancy are actually due a tax refund or tax rebate. So, we’re here to cut through the jargon and help you get back what you’re owed.

Why You Might Be Due a Tax Refund After Redundancy

The PAYE Puzzle

The UK’s Pay As You Earn (PAYE) system is designed for a consistent annual salary. When your employment ends part-way through a tax year (which runs from 6th April to 5th April), your employer has likely been deducting tax based on the assumption you’d earn that full year’s salary. This often leads to an overpayment and a potential tax rebate after redundancy.

Here’s why this “PAYE puzzle” often results in an overpayment:

Annual Tax Calculation: The Unfinished Year — Your Income Tax liability is calculated for the entire tax year. If your income stops or significantly reduces due to redundancy, your actual annual earnings will be lower than anticipated. This means you’ve paid too much tax upfront on income you ultimately didn’t earn for the full year.
Emergency Tax Codes: A Common Culprit — Sometimes, a final payment or even the redundancy payment itself can be processed with an emergency tax code (like 0T M1). These codes deduct tax at a higher, non-cumulative rate, often leading to a larger tax deduction than necessary. It’s a “better safe than sorry” approach by HMRC that often means you’re overpaying.
Income Below Personal Allowance: The Tax-Free Threshold — For the 2024/2025 tax year, most people have a Personal Allowance of £12,570 – this is the amount you can earn tax-free. If your total income for the year, including any taxable redundancy elements, falls below this threshold, you’ll have paid tax unnecessarily on earnings that should have been exempt.

Understanding Tax on Redundancy Payments

Unpacking Your Package

This is often the most confusing part, and it’s where many people miss out. Not all money you receive when leaving a job is treated the same way for tax. Knowing the difference is key to calculating your potential refund.

The £30,000 Tax-Free Golden Rule — The first £30,000 of your genuine redundancy payment (compensation for loss of employment) is completely tax-free. This is a significant benefit designed to help individuals during this transition.
What’s Taxable Above £30,000? Any portion of your redundancy payment that exceeds £30,000 is subject to Income Tax at your marginal rate. Crucially, this excess is not subject to National Insurance Contributions (NICs), which is an important distinction from regular earnings.
Other Payments That Are ALWAYS Taxable (Beware the “Hidden Taxables”) — Be aware that some payments in your redundancy package are always taxable as normal earnings, regardless of the £30,000 threshold. These include:
- Payment in Lieu of Notice (PILON) — Whether it’s contractual or non-contractual, money paid instead of working your notice period is subject to Income Tax and National Insurance.
- Accrued Holiday Pay — Payments for any untaken annual leave.
- Outstanding Wages, Bonuses, or Commission — Any pay for work you’ve already done or earned.
- Restrictive Covenants — Payments for agreeing not to work for a competitor, for example.

Taxfile Insight: It’s vital not to simply assume your employer has calculated everything correctly. Over or underpayments can occur, and it’s ultimately your responsibility to ensure you’re paying (and reclaiming) the right amount of tax. We’ve seen many cases where a simple check of the redundancy payslip reveals significant overpayments.

How to Claim Your Tax Refund

Your Options (And How Taxfile Can Help)

The method for claiming back tax after redundancy largely depends on your individual circumstances. Here are the common routes:

The All-Important P45 — Your employer must provide you with a P45 when you leave. This crucial document summarises your pay and tax deductions for the current tax year. Keep all parts safe – you’ll need Parts 2 and 3 for most claims!
If You Remain Unemployed (for 4+ weeks) and Don’t Claim Taxable Benefits:
- You can often get an in-year refund by completing a Form P50 (“Claiming tax back when you’ve stopped working”). You’ll send this to HMRC along with Parts 2 and 3 of your P45.
- Alternatively, you can claim your refund online via your HMRC Personal Tax Account – this is often the quickest and most straightforward route if you’re comfortable with online services.
If You Start a New Job Quickly (within 4 weeks):
- Hand Parts 2 and 3 of your P45 to your new employer. They should then adjust your tax code, and any overpaid tax should be refunded through your new salary via PAYE. It may take a couple of pay cycles to see the adjustment.
If You Claim Taxable Benefits:
- If you’re claiming benefits like Jobseeker’s Allowance or Carer’s Allowance (which are taxable), the Benefit Office will typically manage your tax refund as your benefits affect your overall tax position. You’ll need to send them Parts 2 and 3 of your P45. (Note: Universal Credit is generally not taxable, so you might still claim directly from HMRC if that’s your only benefit.)
HMRC P800 Tax Calculation (The Automatic Review):
- After the end of the tax year (which is 5th April, so typically summer 2025 for the current tax year), HMRC reviews PAYE records. If they identify an overpayment, they’ll send you a P800 tax calculation, explaining how to claim your tax refund. Important: Since May 2024, HMRC often requires you to actively claim your P800 refund online, rather than sending it automatically. Don’t miss this!
Self Assessment Tax Return (For Complex Cases):
- If your tax affairs are more complex (e.g., you’re self-employed, have significant other income, or need to declare certain payments that fall outside standard PAYE), you might be required or choose to file a Self Assessment tax return. Any overpaid tax would then be reclaimed through this comprehensive process.

Important Deadlines: Don’t Delay! You can generally claim a tax refund for up to four tax years after the end of the tax year in which you overpaid. For example, for the tax year ending 5th April 2021, the deadline to claim would have been 5th April 2025. Don’t leave money on the table!

Beyond the Refund: What Else Should You Consider After Redundancy?

While getting your tax refund is important, redundancy can open up other financial considerations:

Pension Contributions — If you received a significant redundancy payment, consider whether a portion could be paid into your pension. This can offer significant tax relief and boost your retirement savings.
New Employment & Tax Codes — Ensure your new employer uses the correct tax code from your P45. If you don’t have one, they might put you on an emergency code initially, which could again lead to overpayments.
Becoming Self-Employed? Redundancy often sparks a move into self-employment. If this is your plan, you’ll need to register with HMRC as a sole trader and understand your new tax obligations (e.g., Self Assessment, Class 2 & 4 NICs). Taxfile specialises in supporting self-employed individuals!
Income Protection/Benefits — Review any income protection insurance you have, or explore eligibility for state benefits to bridge the gap.
Financial Planning — This is an opportune moment to review your overall financial health, budget, and future goals.

Let Taxfile Take the Burden Off Your Shoulders

Navigating tax refunds after redundancy can be complex, especially during an already stressful period. At Taxfile, we have extensive experience helping individuals just like you claim back the tax they are owed quickly and efficiently.

Why choose Taxfile?

Expert Guidance — We understand the nuances of redundancy payments and tax codes.
Stress-Free Process — We can handle the paperwork and communications with HMRC on your behalf.
Maximise Your Refund — We ensure you claim everything you’re entitled to, avoiding common pitfalls.
Personalised Advice — Beyond the refund, we can offer guidance on your next financial steps, whether it’s understanding tax on a new job or navigating self-employment.

Don’t let overpaid tax remain with HMRC. Contact Taxfile today for a no-obligation chat about your redundancy tax refund. Let us help you claim your cash back and take one less worry off your plate.

020 8761 8000 Book Appointment Contact Us

Today we look at the tax-free allowance thresholds for what’s officially known as the tax-free Personal Allowance in the tax and accountancy world.

The Tax-Free Personal Allowance

This is the amount a UK individual can earn as income before they have to pay any Income Tax. In the current tax year (6 April 2022 to 5 April 2023) individuals can earn up to £12,570 before they have to start paying Income Tax, as you’ll see in the first table. In other words, if their taxable income is two thousand pounds more than that, they’ll only have to pay income tax on the extra £2000, not the core £12,570. There are exceptions, and different rules applied before 2016/17, but our aim is to keep things simple in this guide rather than focusing on more rare exceptions. So, below, we show the Personal Allowance thresholds for tax-free income over the last 7 tax years. As you will see, the Tax-Free Personal Allowance has gradually increased over the years.

Tax Bands for Basic Rate, Higher Rate and Additional Rate Taxpayers

The tables also show the various tax bands for earnings above the Personal Allowance threshold. These are the Basic Rate, Higher Rate and Additional Rate income tax bands, with tax rates increasing the more people earn. The information might be useful if you owe income tax from previous years but bear in mind that anyone born prior to 6 April 1948 may be entitled to a larger Personal Allowance.

Please note: this guide focuses only on Income Tax. Taxpayers will also need to allow for other deductions like National Insurance, which we’ll cover in a separate guide, and things like pension contributions, any student loan interest repayments, any tax on dividends, and so on.

Tax-Free Allowance Thresholds 2022/23

For the tax year 6 Apr 2022 to 5 Apr 2023:
The first £12,570 (your Personal Allowance) is tax-free*
Earnings between £12,571 and £50,270 are taxed at 20% (‘Basic Rate’ income tax)
Earnings between £50,271 and £150,000 are taxed at 40% (‘Higher Rate’ income tax)
Earnings over £150,000 are taxed at 45% (‘Additional Rate’ income tax)

* For every £2 earned above £100,000, the Personal Allowance is reduced by £1. It therefore reduces to zero for earnings of £125,140 or more.

Tax-Free Allowance Thresholds 2021/22

For the tax year 6 Apr 2021 to 5 Apr 2022:
The first £12,570 (your Personal Allowance) is tax-free*
‘Basic Rate’ earnings between £12,571 and £50,270 are taxed at 20%
‘Higher Rate’ earnings between £50,271 and £150,000 are taxed at 40%
‘Additional Rate’ earnings over £150,000 are taxed at 45%

* For every £2 earned above £100,000, the Personal Allowance is reduced by £1. It therefore reduces to zero for earnings of £125,140 or more.

Tax-Free Allowance Thresholds 2020/21

For the tax year 6 Apr 2020 to 5 Apr 2021:
The first £12,500 (your Personal Allowance) is tax-free*
‘Basic Rate’ earnings between £12,501 and £50,000 are taxed at 20%
‘Higher Rate’ earnings between £50,001 and £150,000 are taxed at 40%
‘Additional Rate’ earnings over £150,000 are taxed at 45%

* For every £2 earned above £100,000, the Personal Allowance is reduced by £1. It therefore reduces to zero for earnings of £125,000 or more.

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Tax Refunds After Redundancy: Claiming Your Cash Back – A Taxfile Guide