For some, redundancy will be a welcome pause. For many, it will come with a wave of uncertainty. But whichever way you feel, it’s important to see this for what it can be: a rare chance to reassess, reset, and take charge of your next move.
Having a financial cushion in the form of redundancy pay creates the space to consider a new direction – perhaps starting your own business, changing industry, or working more flexibly. And with an independent financial adviser by your side, you can build a clear picture of what those choices might look like in practice. Redundancy can be a significant event that, with careful planning, has the potential to change your life.
This guide will help you make sense of the financial options available. It’s all about making informed choices that support your immediate needs and set you up for the future.
Understanding the tax side of redundancy pay
In the UK, the first £30,000 of redundancy pay is usually tax-free.
This provides a helpful buffer, especially when planning for the months ahead. However, any amount above £30,000 is considered taxable income, which could potentially bump you into a higher tax bracket and lead to a bigger tax bill than expected.
This is where advice from both a financial adviser and your accountant becomes invaluable. With the right planning, you can avoid overpaying tax and put more of that money towards your personal goals.
Using redundancy pay to boost your pension
• Why it’s worth considering
By contributing to your pension, you reduce your taxable income. If your employer can arrange this directly through payroll, that portion of your redundancy pay won’t be taxed at all – it goes straight into your future.
• Can your employer help?
In some cases, your employer might allow your redundancy payment to be redirected into your workplace pension scheme. This is one of the most straightforward and tax-efficient routes available.
• Be aware of pension limits
Most people can contribute up to £60,000 per year to their pension (though this depends on your income and circumstances). If you haven’t used your full allowance over the past three years, you may be able to carry forward unused relief, giving you more room to make a one-off, larger contribution.
• What if employer contributions aren’t an option?
Not every employer offers this route. But don’t worry, there’s another way. You can still make a personal pension contribution using the redundancy pay you’ve received. While this won’t reduce your current year’s income tax in the same way, you’ll still benefit from 20% basic-rate tax relief.
And if you’re a higher-rate taxpayer, you can claim additional relief through your tax return. It might take a little extra effort, but it’s a valuable way to stretch your pay-out.
Other tax-efficient options for your redundancy pay
If your pension is already topped up or you’re looking to diversify, there are other ways to invest your redundancy payout.
• Maximise your ISA allowance
If you already have an Individual Savings Account (ISA), redundancy might give you the means to top it up to the annual limit – currently £20,000 each tax year.
ISAs are a popular choice for tax-free investing or saving, with no tax on income, dividends, or capital gains. If you have a partner, they have their own allowance too – doubling your household’s opportunity to save or invest tax-efficiently.
• Investing in property
For some, property investment is a familiar and tangible option. Whether it’s a Buy to Let, a second home, or even funding home improvements to increase existing value, property can play a key role in long-term wealth building.
It might not come with the same tax advantages as pensions or ISAs, but with the right strategy and professional advice, it can be a strong part of a diversified portfolio.
• Fine wine, art and alternative assets
Depending on your interests, redundancy may be the moment to explore alternative investments such as fine wine, art, or other collectibles. These types of assets offer different risk-return profiles and tax implications – and while they won’t suit everyone, they can be an interesting complement to more ‘traditional’ holdings. As always, it’s wise to seek expert guidance before committing.
• Thinking beyond: VCTs and EIS
For more experienced investors comfortable with higher risk, Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) offer significant tax perks. These specialist investments come with generous tax reliefs, but they are higher risk and more complex. They’re typically suited to more experienced investors with a higher risk appetite and a long-term outlook.
Speak to an Amber River financial planner
Redundancy can be a defining moment. And with the right support, it has the potential to lead to something more fulfilling, more flexible, and more financially secure.
An Amber River financial planner can:
- Discuss the opportunities that redundancy can bring
- Help you use your pay-out to top up your pension without breaching limits
- Identify other appropriate investment options
- Maximise any tax benefits available to you
- Build a tailored financial plan based on your new circumstances and goals
At Amber River, advisers take the time to understand you, not just your finances. It’s about thoughtful support, personal guidance, and helping you move forward with clarity and confidence.
Get in touch
Amber River has a network of Chartered financial planners right across the UK, ready to offer truly independent advice. If you want to set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
