Paying Redundancy Into a Pension
If you've received a redundancy payment, contributing some or all of it to a pension can be a tax-efficient way to boost your retirement savings.
Can You Pay Redundancy Into a Pension?
Receiving a redundancy payment can be a stressful experience, but it also presents an opportunity to boost retirement savings in a tax-efficient way. Whether and how much to contribute depends on the type of redundancy payment, your pension annual allowance, and your personal tax position.
Types of Redundancy Payment
Redundancy payments come in two main forms:
- Statutory redundancy pay: The minimum legal entitlement, based on age, weekly pay (capped at £643 in 2026), and years of service (capped at 20 years). The first £30,000 of redundancy pay is exempt from income tax and National Insurance.
- Enhanced/contractual redundancy pay: Additional payment above the statutory minimum. The first £30,000 in total (including statutory pay) is tax-free; anything above £30,000 is taxed as income.
Paying Redundancy Into a Pension: The Tax Benefit
The taxable element of a redundancy payment — i.e., anything above £30,000 — can be contributed to a pension to receive income tax relief. The contribution reduces your taxable income for the year, potentially saving tax at 20%, 40%, or 45% depending on your tax band.
For example, if you receive a £50,000 redundancy payment, £30,000 is tax-free and £20,000 is taxable. Contributing the £20,000 taxable element to a pension means it escapes income tax (and you receive basic-rate tax relief added by the pension provider, with higher-rate taxpayers able to reclaim additional relief via self-assessment).
The Annual Allowance
Pension contributions are subject to the Annual Allowance of £60,000 in 2026/27 (or your relevant earnings if lower). You can also use carry-forward to contribute up to three previous years' unused allowance, potentially allowing a very large contribution in a redundancy year.
Importantly, if you have already flexibly accessed a pension (triggering the Money Purchase Annual Allowance of £10,000), your ability to make large pension contributions is significantly restricted.
Redundancy and Pension in the Same Tax Year
If you are made redundant in the same tax year you plan to retire, careful planning around the timing of pension access can be beneficial. In a year with lower total income (no salary, modest redundancy payment), pension withdrawals may be taxed at a lower rate.
Employer Contributions on Redundancy
Some employers offer to contribute all or part of a redundancy payment directly into a pension as an employer contribution, avoiding National Insurance on the amount. This can be more tax-efficient than receiving the payment personally and then contributing it — but requires negotiation with the employer and is not universally available.
Speak to a qualified financial adviser for personal guidance on the most tax-efficient way to handle a redundancy payment in the context of your retirement planning.