Published: September 2026 | Fact-Checked & Audited By: Tax Calculators for UK Editorial Team (Chartered Tax Advisor & Accountant)
This guide is fully updated for the 2026/27 UK tax year. All statutory redundancy formulas, £30k exemption thresholds, and PENP notice rules are audited against active HMRC manuals and Section 401 ITEPA 2003.
Receiving a substantial redundancy settlement or severance package is a significant financial transition. However, when an enhanced termination payment exceeds the statutory £30,000 tax-free exemption, the excess is treated as taxable employment income and subjected to 40% Higher Rate, 45% Additional Rate, or the punitive 60% Personal Allowance Taper Trap. Using Redundancy Pension Sacrifice allows employees to legally divert the taxable excess directly into their workplace pension pot, eliminating income tax liabilities entirely.
1. How Redundancy Pension Sacrifice Operates
Under a redundancy pension sacrifice (or severance waiver) agreement, you formally instruct your employer before termination to direct some or all of the severance payment exceeding £30,000 directly into your registered workplace pension scheme as an employer pension contribution:
- The first £30,000 of qualifying redundancy pay is paid directly into your bank account 100% tax-free.
- The taxable excess above £30,000 is diverted directly into your pension scheme before PAYE tax is deducted.
- Because the money enters the pension as an employer contribution, you receive immediate 100% income tax relief, avoiding 20%, 40%, 45%, or 60% tax.
- Your employer also saves their 13.8% Employer Class 1A National Insurance on the taxable redundancy excess and may pass some of this savings into your pension pot!
2. Financial Comparison: Taking Cash vs. Pension Sacrifice (£60,000 Redundancy)
Let us compare a Higher Rate (40%) taxpayer receiving a £60,000 redundancy payment under two scenarios in the 2026/27 tax year:
| Financial Element | Option A: Take 100% as Cash | Option B: Sacrifice £30k Taxable Excess to Pension |
|---|---|---|
| Tax-Free Redundancy Slice (£30,000) | £30,000.00 (Tax-Free into Bank) | £30,000.00 (Tax-Free into Bank) |
| Taxable Excess (£30,000) | £30,000.00 Gross Cash | £0.00 Cash (£30,000 to Pension) |
| Income Tax on Excess (40% Higher Rate) | -£12,000.00 Tax Paid to HMRC | £0.00 Tax (100% Relief) |
| Net Cash in Bank Account | £48,000.00 | £30,000.00 |
| Added to Retirement Pension Pot | £0.00 | £30,000.00 |
| Total Net Wealth Retained | £48,000.00 Total | £60,000.00 Total (£12,000 Wealth Gain!) |
By choosing pension sacrifice, the employee captures an immediate £12,000 tax saving, retaining 100% of the £60,000 settlement package! You can test your personal savings using our Redundancy Pay Calculator.
3. Beating the £100,000 Tax Trap with Severance Sacrifice
If your final year salary plus a taxable redundancy lump sum pushes your total annual Adjusted Net Income above £100,000, you face the severe 60% Personal Allowance taper:
- For every £2 of severance earned above £100,000, you lose £1 of your £12,570 Personal Allowance.
- Taking the redundancy as cash results in a punitive 60% marginal income tax deduction on earnings between £100,000 and £125,140.
- In addition, crossing £100,000 triggers the immediate total loss of Tax-Free Childcare and 30 hours of free nursery funding (worth £5,000+ per child).
- Sacrificing the severance into a pension keeps your Adjusted Net Income under £100,000, restoring your full Personal Allowance and saving thousands in nursery fees.
4. Checking Pension Allowance Limits & Carry Forward Rules
Before executing a redundancy pension sacrifice, ensure your contribution remains within statutory limits:
- Annual Allowance: The standard UK Pension Annual Allowance is £60,000 per tax year.
- Carry Forward Rules: If your severance sacrifice exceeds £60,000, you can utilize unused allowances from the previous 3 tax years, allowing contributions of up to £180,000+ if eligible.
- Money Purchase Annual Allowance (MPAA): If you have previously flexibly accessed a defined contribution pension, your annual contribution limit is capped at £10,000.
5. Frequently Asked Questions (FAQ)
Q: Can my employer refuse a redundancy pension sacrifice request?
A: Yes. Employers are not legally mandated to offer redundancy pension sacrifice. However, most UK employers agree because it also saves the company 13.8% in Employer Class 1A National Insurance.
Q: When must the pension sacrifice agreement be completed?
A: The agreement must be documented and signed in writing before you become legally entitled to receive the redundancy payment (typically prior to signing the final settlement agreement).
Q: Can I sacrifice the tax-free £30,000 into my pension?
A: You can, but it is usually unnecessary. Because the first £30,000 is already 100% tax-free cash, most individuals take the £30k into their bank account and sacrifice only the taxable excess.
Q: Can I pay redundancy money into a personal SIPP instead of a workplace pension?
A: If your employer cannot make a direct employer contribution to your SIPP, you can take the cash, pay it into your SIPP, and claim basic and higher rate tax relief from HMRC via your Self Assessment tax return.
Q: At what age can I access the money sacrificed into my pension?
A: Under current UK rules, you can access your private pension from age 55 (rising to age 57 from April 2028), taking 25% of the pot completely tax-free.
Q: Does redundancy pension sacrifice reduce my entitlement to Jobseeker’s Allowance (JSA)?
A: New Style JSA is based on your National Insurance contributions and is not means-tested against your pension pot balance.
Q: Will pension sacrifice affect my mortgage application?
A: Mortgage lenders evaluate your future sustainable earnings rather than one-off redundancy lump sums. Sacrificing into a pension preserves wealth without negatively impacting mortgage assessments.
Q: What happens if my redundancy contribution exceeds my annual allowance?
A: Any pension contribution exceeding your available annual allowance and carry forward is subject to an Annual Allowance Tax Charge at your marginal income tax rate.
Calculate Your Take-Home Pay & HMRC Deductions
Put the figures from this guide into practice with our free, HMRC-audited interactive calculation tools: