Paying redundancy pay into a pension: is it tax efficient?

Pension redundancy sacrifice: your employer pays some redundancy money into your pension, tax and National Insurance free within the annual allowance.

It moves some of a termination payment from cash into your pension, and it only works if your employer agrees. Below is how it compares with taking cash, what the annual allowance and carry forward do to it, and what to ask payroll. Your own package is a matter for the FCA-authorised advisers behind the short form on this page, who ring back without charge.

Can part of your redundancy pay go into your pension?

Yes, if your employer is willing to make the payment. GOV.UK lists "contributions your employer makes to a registered pension scheme as part of your termination payment" among the things you do not pay tax and National Insurance on, adding that "you’ll pay tax on any employer contributions that go above the Annual Allowance" (GOV.UK, Tax on termination payments, accessed 27 October 2026).

The route is a salary sacrifice in practice: you give up cash and the employer pays the same sum into your scheme. HMRC’s Employment Income Manual says that where such a sacrifice is accepted as successful, "the potential future cash remuneration sacrificed is not taxable" and the contribution made in return is the employer’s, so it is "not taxable on the employee" (HMRC, EIM42780, accessed 2 November 2026). Timing matters. HMRC’s termination guidance says the exemption cannot lift tax on pay you are already contractually owed, so any such entitlement is usually waived before the contribution is made (HMRC, EIM13735, accessed 2 November 2026). Its general salary sacrifice guidance says the same: the right to the pay must be given up before it counts as received (HMRC, EIM42765).

HMRC describes it as something employer and employee may agree as part of the termination arrangements, normally by adjusting the termination payment, so it needs your employer’s agreement; ask early. For the general workings of the same idea during employment, see pension salary sacrifice tax and employer pension contributions tax.

How does paying it in compare with taking the cash?

The comparison turns on which part of the package you are looking at, because not all of it is taxed alike.

• The first £30,000. GOV.UK says you "do not usually pay tax" on the first £30,000, counting statutory redundancy, enhanced redundancy and non-cash benefits together; anything above that total is taxed. For that slice, cash is already free of income tax, so paying it into a pension saves no further income tax at the point it goes in. HMRC adds that a qualifying employer contribution does not use up any of the £30,000 threshold for that termination (EIM13735).
• Above £30,000. The excess is taxed under PAYE through your final payslip, and your employer pays Class 1A National Insurance on it. Paid to your pension instead, the sum is outside tax and National Insurance, subject to the annual allowance below.
• Notice pay. Anything you receive instead of working your notice, including part of a severance payment treated as post-employment notice pay, is taxed with National Insurance as earnings. Your employer works out how much counts, and can tell you whether any of it could be paid into a pension instead.

Money in a pension is out of reach until you reach the minimum age. The FCA says that "generally, you can only take money from your pension when you’re 55 or older except in certain cases, such as poor health. This will increase to 57 from 2028" (FCA, Pension scams, last updated 19 January 2026). Cash can be spent now, while pension savings are for later; how money coming out is taxed is in the tax-free lump sum guide. How your own tax would change depends on your total income that year, so payroll has to run the numbers for you. If your employer is open to the idea, an adviser can check it against your other pots, and the short form here books that call at no cost.

Is it better to pay in yourself and claim tax relief?

You can instead take the cash and make a personal contribution, but the relief is limited by earnings. HMRC’s Pensions Tax Manual says relief is "limited to 100% of their relevant UK earnings that are chargeable to income tax for the tax year", and spells out that "the first £30,000 of the redundancy payment is not classed as employment income so does not count here". Only the part above £30,000 counts, along with any wages, holiday pay or notice pay bundled in (HMRC, PTM044100, accessed 26 October 2026). The same manual adds that "contributions paid by a member’s employer do not qualify for tax relief for the member"; an employer’s contribution is instead not taxed on you at all.

If a sacrifice is not accepted as effective, HMRC treats you as still taxed on the higher cash, and the payment becomes your own contribution with tax relief, though for redundancy money that relief is still capped by the earnings rule above (HMRC, EIM42775). How relief is added for a personal payment is covered in the pension tax relief guide and relief at source and net pay.

Could the payment push you over your pension limit?

Each tax year there is a ceiling on what can go into all your pensions combined before a charge arises. GOV.UK gives the annual allowance as "£60,000 this tax year", which is 2026/27, and says it counts "the total amount paid in to a defined contribution scheme in a tax year by you or anyone else (for example, your employer)" (GOV.UK, Annual allowance, accessed 27 October 2026). A redundancy contribution therefore adds to everything else paid in that year, including your employer’s ordinary contributions before you left. If you have flexibly accessed a pot, or have a high income, the allowance can be lower; see the money purchase annual allowance and the tapered allowance.

Carry forward can make room. GOV.UK says you "might be able to carry over any annual allowance you did not use from the previous 3 tax years", and HMRC’s manual adds that you need to have belonged to a registered scheme at some point in each earlier year you borrow from (HMRC, PTM055100, accessed 27 October 2026). The details are in the carry forward guide, and the charge for going over is in the tax charge guide.

What should you ask your employer before agreeing?

• Will you make an employer contribution as part of the termination payment, and in which tax year will it be paid?
• Which scheme will receive it, and will that scheme accept a one-off payment after you have left?
• How much of the package is notice pay or holiday pay, which cannot be treated as the tax-free £30,000 part?
• Has anything been paid into your pensions already this tax year that the payment adds to?
• Can the terms be confirmed in writing before you sign?

If you are in a final salary scheme, the deferred pension you have already built is a separate matter, covered in final salary pension redundancy; the wider package is in early retirement packages. Written replies from the employer can then go to an FCA-authorised adviser, laid over your other pensions and tax, and requesting that call through the short form here costs nothing.

Redundancy pay and pension: more answers

Is there a pension redundancy sacrifice calculator?

There is no calculator on this page, because the tax saved depends on your other income that year and on how much of the package is over £30,000. Payroll can show what it would deduct.

Can I pay redundancy money in after I have left?

A payment you make yourself is a personal contribution, not an employer’s, and the earnings limit for relief described above applies to it. The tax-free employer route needs the employer to make the payment as part of the termination arrangements.

Does the payment count towards my adjusted income?

Yes, for the tapered annual allowance: when you work out adjusted income, GOV.UK says to "add the amount of pension savings your employer made for you" (GOV.UK, Work out your reduced (tapered) annual allowance, last updated 16 July 2024). employer pension contributions and adjusted net income explains the difference between the measures.

What if the sacrifice is not accepted by HMRC?

HMRC’s manual says you stay taxed on the cash, and the payment is treated as your own contribution, with relief limited to your relevant UK earnings for the year. Your payroll team can say how the employer would treat it.

Does a contribution from redundancy pay need to be reported?

If the contribution takes you over the annual allowance you must fill in the "Pension savings tax charges" section of a Self Assessment return, GOV.UK says, even if the pension provider pays part of the tax.