Introduction: Why a UK Redundancy Payment Costs More Once America Taxes It
A UK redundancy payment arrives with a comforting British headline: the first £30,000 is tax free. However, that headline applies to one country only. Consequently, American citizens leaving a City role routinely discover that Washington taxes the entire sum, including the portion Britain deliberately exempted.
The gap is not theoretical. Furthermore, a senior banker whose UK redundancy payment reaches £450,000 can face a US liability on money that generated no British tax at all. Therefore, the exempt slice produces no foreign tax, which means no foreign tax credit, which means the American charge lands undiluted.
Most redundancy guidance ignores this entirely. Additionally, British guides address British employees, and American guides assume a domestic severance cheque. Meanwhile, nobody explains what happens when a UK redundancy payment meets US citizenship-based taxation.
This guide fills that gap. Specifically, it covers the 2026/27 British figures, the American treatment, the sourcing rules that decide which country taxes what, and the timing mismatch that strands credits. Ultimately, you will understand the exposure before you sign the settlement agreement rather than afterwards.
What a UK Redundancy Payment Actually Contains
A modern exit package is rarely one payment. Furthermore, a typical UK redundancy payment bundles statutory redundancy pay, an enhanced contractual element and pay in lieu of notice. Additionally, it often carries accrued holiday and a sum for restrictive covenants. Consequently, each strand carries its own tax character on both sides of the Atlantic.
That composition matters enormously. Notably, Britain taxes the strands of a UK redundancy payment differently from one another, while America largely does not. Therefore, the British split determines your foreign tax credit position even though it never changes your American taxable amount.
Bonus and share awards frequently settle at the same time. Nevertheless, they follow separate rules, so we treat them apart from the UK redundancy payment itself throughout this guide.
Why the £30,000 Exemption Disappears at the American Border
The British exemption is a domestic statutory relief. However, the United States taxes its citizens on worldwide income and recognises foreign reliefs only where a treaty says so. Consequently, no article of the US-UK treaty converts the £30,000 exemption into an American exclusion.
The practical arithmetic is unforgiving. Specifically, £30,000 of exempt British income produces zero UK tax, so it generates zero credit against the US charge. Therefore, the most generous feature of a UK redundancy payment is precisely the feature that creates American tax.
The British Calculation for 2026/27
Getting the British side of a UK redundancy payment right comes first, because those figures drive your credit. Furthermore, the rates changed on 6 April 2026, and several widely-read guides still publish the previous figures.
Statutory Redundancy Pay: The Current Caps
Statutory entitlement follows age bands. Specifically, the official gov.uk rules give half a week's pay for each full year under 22. Meanwhile, service from 22 to 40 earns one week per year. Additionally, each full year at 41 or older earns one and a half weeks.
Two caps then bite. Additionally, weekly pay is capped at £751 for redundancies on or after 6 April 2026, and service counts for a maximum of 20 years. Consequently, the maximum statutory element of any UK redundancy payment is £22,530.
Those figures rose in April 2026. Nevertheless, several current guides still cite the older £643 weekly cap and a £19,290 maximum. Therefore, verify the date of any calculator you use, because a stale cap distorts the whole computation.
For a City salary the statutory slice of a UK redundancy payment is almost irrelevant. Meanwhile, the enhanced contractual element typically dwarfs it, which is exactly where the £30,000 threshold gets consumed.
Post-Employment Notice Pay and the Lost Threshold
The 2018 reforms changed everything. Specifically, HMRC guidance on relevant termination awards confirms that post-employment notice pay is treated as general earnings and no longer benefits from the £30,000 threshold.
The mechanic runs in a fixed order. Furthermore, you calculate post-employment notice pay on the UK redundancy payment first, strip it out, and only then apply the threshold to what remains. Consequently, a package containing substantial unworked notice sees the exemption applied to a much smaller base.
Consider the effect concretely. For instance, a £50,000 award containing £5,000 of post-employment notice pay leaves £45,000 tested against the threshold. Therefore, £5,000 is taxed as ordinary earnings and £15,000 as excess, leaving only £30,000 genuinely exempt.
Statutory redundancy pay retains its protection. Nevertheless, it is aggregated with other qualifying elements before the threshold applies, so it rarely survives untouched in a senior package.
National Insurance and the Lifetime Limit
National Insurance treatment is asymmetric. Additionally, the excess over £30,000 attracts employer Class 1A contributions but no employee contributions. Consequently, your UK redundancy payment costs your employer more than it costs you in social security terms.
One further trap deserves attention. However, the £30,000 figure is a limit per employment rather than per tax year. Consequently, two payments from the same employer share a single threshold, while genuinely separate employers each give their own.
American social security rarely reaches the payment. Nevertheless, anyone still holding a certificate of coverage under the US-UK social security agreement should confirm its position before the final payroll run. Therefore, check the certificate dates alongside your leaving date.
The American Calculation: Almost Everything Is Taxable
America starts from a different premise. Specifically, section 61 sweeps in all income from whatever source derived, and no provision exempts severance. Therefore, the whole UK redundancy payment enters your adjusted gross income.
The character is ordinary compensation. Furthermore, a UK redundancy payment therefore faces ordinary rates rather than capital rates, and it can push you into the top bracket in a single year. Consequently, a package spanning years of service compresses into one American tax year.
When Severance Qualifies for the Foreign Earned Income Exclusion
The exclusion offers genuine relief, within limits. Specifically, severance counts as earned income where it compensates past services, following long-standing revenue ruling authority. Consequently, a UK redundancy payment attributable to years worked in London can qualify.
Two conditions govern the outcome. Additionally, you must satisfy either the bona fide residence test or the physical presence test for the year of receipt, and the payment must relate to services performed abroad. Therefore, the foreign earned income exclusion rules and section 911 itself both require careful reading before you rely on them.
Timing creates the most common failure. Nevertheless, many people leave Britain shortly after redundancy, which can break the residence test for the very year the payment arrives. Consequently, the exclusion they expected disappears precisely when they need it.
The annual cap limits the benefit anyway. Meanwhile, the exclusion covers a fixed amount each year, so a large UK redundancy payment exceeds it comfortably. Therefore, Form 2555 rarely solves a senior package on its own.
What Disqualifies a Payment From the Exclusion
Not every element of a UK redundancy payment counts as earned income. Specifically, amounts paid as consideration for cancelling an employment contract, or for agreeing to a restrictive covenant, fall outside the concept. Consequently, those strands cannot be excluded even where the rest of the package can.
Settlement agreements often blur these categories deliberately. However, the drafting controls the analysis, so an undifferentiated lump sum invites the least favourable treatment. Therefore, we ask to review the wording before signature whenever a client can arrange it.
Non-compete payments deserve particular caution. Additionally, they are frequently sourced to where the restriction applies rather than where past services occurred. Accordingly, they can produce American-source income even for someone who never worked in America.
Where the Foreign Tax Credit Fits
A UK redundancy payment relies on the credit for most of its relief. Furthermore, British tax on the excess above £30,000 reaches 45% for additional-rate taxpayers, which comfortably exceeds American rates. Consequently, the foreign tax credit usually eliminates the US charge on the taxed portion.
The exempt portion remains the problem. Meanwhile, no British tax attaches to the first £30,000, so no credit exists to offset the American liability on it. Therefore, the exposure concentrates precisely in the slice Britain intended as relief.
You cannot claim both reliefs on the same income. Nevertheless, you may exclude one tranche and credit another, provided the allocation is consistent. Accordingly, Form 1116 and Form 2555 must be modelled together rather than in sequence.
Sourcing: Deciding Which Country Taxes Which Slice
Sourcing of a UK redundancy payment determines your credit limitation, so it deserves real attention. Furthermore, compensation is sourced by reference to where the services were performed, not where the employer sits or where the money lands.
The Time-Basis Apportionment Rule
American rules apply a time basis. Specifically, the regulations on compensation sourcing apportion pay between American and foreign sources using days worked in each place over the relevant period. Consequently, a UK redundancy payment earned across ten London years is overwhelmingly foreign-source.
Business trips complicate this. However, they matter more than people expect, because a New York client visit fortnight each year creates American workdays across the whole service period. Therefore, the apportionment produces a small but real American-source slice.
That slice cannot be sheltered. Meanwhile, foreign tax credits relieve foreign-source income only, so American-source severance faces American tax with no credit available. Accordingly, we reconstruct travel calendars for senior clients rather than assuming a wholly foreign result.
What the Treaty and the OECD Commentary Say
The treaty allocates employment income under its employment article. Additionally, HMRC's guidance on applying double taxation agreements to termination payments confirms that each element requires separate analysis under the OECD commentary.
Two allocations are settled. Specifically, pay for notice not worked belongs to the country where the employee usually worked. Meanwhile, unused holiday pay splits according to residence across the final twelve months of employment. Therefore, a package spanning a relocation year can genuinely split between jurisdictions.
The savings clause then intervenes for Americans. Nevertheless, the United States reserves the right to tax its citizens as though the treaty did not exist, so treaty allocation rarely removes the American charge. Consequently, the treaty determines Britain's rights while the credit mechanism handles yours.
Where the Two Countries Disagree
Mismatches on a UK redundancy payment happen, and they cost money. Furthermore, HMRC sources a payment by reference to the remuneration it replaces. However, some treaty partners look instead at where the payment was negotiated. Consequently, both countries occasionally claim the same slice.
Professional analysis on this point is thin. Meanwhile, the leading practitioner commentary, including KPMG's overview of cross-border termination payments, runs to barely a thousand words and addresses employers rather than individuals. Therefore, individuals are largely left to work it out unaided.
Foreign Service Relief and the Non-Resident Position
A valuable British relief exists, but it narrowed sharply. Specifically, foreign service relief once removed part of a termination award from British tax where the employee had worked substantially abroad. However, the 2018 reforms generally restricted it to non-residents.
Who Can Still Claim It
Residence in the year the UK redundancy payment arrives decides access. Furthermore, an American who remains UK resident when the package pays cannot use the relief, regardless of prior overseas service. Consequently, the relief helps departing employees far more than arriving ones.
The interaction with American tax is counterintuitive. Notably, foreign service relief reduces British tax, which reduces your foreign tax credit, which can increase your American liability. Therefore, a relief that looks valuable in isolation occasionally leaves a dual national worse off overall.
We model both outcomes before claiming. Additionally, the answer turns on whether your remaining British tax still exceeds the American charge on the same income. Accordingly, the relief remains worthwhile in most cases, but never automatically.
Non-Residents and Post-Employment Notice Pay
A further change caught departing employees. Specifically, since April 2021 non-residents face a British charge on the UK-sourced portion of post-employment notice pay. Consequently, leaving Britain before the payment arrives no longer removes the British charge on that element.
That change improved the American position slightly. Nevertheless, it did so only by increasing British tax, which then generates credit. Therefore, the net effect depends entirely on your marginal rates in each country.
The Timing Trap: PAYE Codes and Wasted Credits
Timing destroys more value in a UK redundancy payment than the rules themselves. Furthermore, payroll mechanics and tax-year misalignment interact badly for anyone holding both passports.
The 0T Code After Your P45
Once your employer issues a P45, special payroll arrangements end. Consequently, any later payment suffers withholding under an emergency 0T code, which applies the tax bands without any personal allowance. Therefore, a UK redundancy payment landing after your P45 is frequently over-withheld.
Recovery takes time. Meanwhile, you reclaim the excess through Self Assessment or a repayment claim, which can run months beyond the American filing deadline. Accordingly, you may claim a foreign tax credit for tax you will later reclaim.
That creates a correction obligation. Nevertheless, the fix is well established, because a later British refund triggers a foreign tax redetermination and an amended American return. Therefore, plan for the second filing rather than treating the first as final.
Tax Years That Do Not Align
Britain runs to 5 April while America runs to 31 December, so a UK redundancy payment can straddle both. Consequently, a March payment falls in one British tax year and the preceding American one, which splits the income from the tax that relieves it. Furthermore, that split can strand credits in a year with no matching income.
The cash basis makes this worse. However, an election to claim credits on the accrual basis aligns the two, matching British tax to the year the income arose. Nevertheless, the election is irrevocable, so our treaty and foreign tax credit specialists model it carefully before filing.
Case Study: A £410,000 Exit From a London Trading Desk
Consider a pattern we see each redundancy cycle. An American dual national, aged 47, left a London trading role in November 2026 after eleven years with the same employer. Furthermore, she remained UK resident throughout the tax year of payment.
Her UK redundancy payment totalled £410,000. Specifically, it comprised £22,530 of statutory redundancy pay, £287,470 of enhanced contractual redundancy, £75,000 of post-employment notice pay, and £25,000 for a twelve-month restrictive covenant.
How Britain Taxed It
The British computation followed the statutory order. Additionally, the £75,000 of post-employment notice pay was stripped out first and taxed as general earnings. Meanwhile, the covenant payment also fell outside the threshold, being taxable in full.
That left £310,000 tested against the exemption. Consequently, £30,000 escaped British tax and £280,000 was taxed as excess. Therefore, her total British tax across the package reached roughly £171,000, an effective rate near 41.7%.
How America Taxed It
America taxed the entire UK redundancy payment of £410,000. Furthermore, her workday reconstruction showed 14 American business days per year across eleven years, producing a foreign-source proportion of approximately 94.5%. Consequently, around £22,550 of the package was American-source with no credit available.
The exclusion helped modestly. Nevertheless, she satisfied bona fide residence, so she excluded the annual maximum against the earned portion. Therefore, the excluded tranche removed a slice, while credits covered most of the remainder.
The Residual Bill and What Fixed It
Her residual American liability came to roughly $28,400. Specifically, it arose from the American-source workday slice, and from the £30,000 British exemption that carried no creditable tax. Consequently, the "tax free" element proved the single largest driver of her American charge.
Two adjustments improved the outcome materially. Additionally, deferring £60,000 of the package into the following calendar year spread the income across two American tax years and two credit limitations. Meanwhile, separating the covenant payment in the settlement wording clarified its character rather than leaving it bundled.
Those changes were available only before signature. Therefore, we review draft settlement agreements wherever timing permits, because a UK redundancy payment becomes largely fixed once the document is executed.
Planning Before You Sign
Sequencing beats remediation. Furthermore, almost every meaningful lever on a UK redundancy payment sits in the negotiation rather than the tax return. Consequently, involving a cross-border specialist early pays for itself repeatedly.
Levers Worth Negotiating
Payment timing is the most powerful. Specifically, splitting a package across two calendar years creates two American limitations and two sets of bands. Therefore, it frequently reduces the aggregate charge without costing the employer anything.
Documentation ranks second. Additionally, identifying which sums compensate past service, which cover notice, and which buy restrictive covenants determines both the British threshold and the American exclusion. Accordingly, precise drafting is worth more than most negotiated uplifts.
Pension contributions deserve consideration too. Nevertheless, employer contributions carry their own American consequences, so they are not a straightforward shelter for a dual national. Meanwhile, our cross-border planning team models the interaction before anyone commits.
Records to Preserve
Keep the UK redundancy payment settlement agreement permanently. Furthermore, retain your final payslips, your P45, the PENP computation and, critically, a reconstructed record of American workdays across your entire service period. Consequently, the sourcing analysis stands up if questioned.
Travel records prove hardest to rebuild later. However, calendar exports, expense claims and passport stamps usually suffice. Therefore, gather them while your corporate access still works, not after it lapses.
How TaxYork Can Help With Your Exit Package
At TaxYork, we advise senior Americans leaving British roles throughout each redundancy cycle. Furthermore, we handle both filings, which means the British and American positions are modelled as one problem rather than two.
Our work starts before signature wherever possible. Specifically, we review the draft settlement agreement, model the split between exempt and taxable British elements, and project the American charge under alternative payment dates. Consequently, you negotiate with real numbers rather than assumptions.
We then prepare both returns. Additionally, that includes the sourcing analysis, the exclusion and credit modelling, and the Self Assessment claim that recovers any 0T over-withholding. Therefore, our US tax return preparation for expats covers the full cycle rather than a single year.
When the Payment Uncovers Older Problems
A UK redundancy payment frequently surfaces historic gaps. Nevertheless, that is common rather than alarming, because a large payment prompts people to examine filings they had ignored. Moreover, where earlier American returns or foreign account reports are missing, our IRS Streamlined Filing service brings everything current before the payment year is filed.
Account reporting often changes too. Consequently, a large lump sum can push balances past reporting thresholds for the first time, which brings FBAR and FATCA obligations into play. Meanwhile, HMRC guidance and ICAEW technical resources govern the British side, and IRS Publication 54 sets out the American framework for citizens abroad.
Conclusion: The Exempt Slice Is the Expensive One
A UK redundancy payment rewards planning more than almost any other cross-border event. Furthermore, the amounts are large, the timing is negotiable, and the documentation is drafted rather than fixed. Therefore, the window for improvement is real but short.
Remember where the exposure concentrates. Specifically, the £30,000 British exemption generates no foreign tax and therefore no credit, which makes it the most expensive part of the package in American terms. Consequently, the relief that feels generous in London creates the bill in Washington.
Act before signature. Additionally, review the sourcing, the payment dates and the wording while they remain negotiable. Ultimately, a UK redundancy payment structured with both tax systems in view preserves considerably more than one structured for Britain alone. Further support for citizens abroad is available through the Taxpayer Advocate Service international pages, and treaty texts sit on the IRS treaty index.
Contact Us
Have you been offered a settlement agreement, or received a package already? Furthermore, our specialists can model the British and American charge together and identify what remains negotiable. Therefore, book a consultation with our US-UK team promptly.
Email hello@taxyork.com or telephone 020 3488 8606. Additionally, you can review our full US personal tax services beforehand. Meanwhile, every initial conversation remains confidential and carries no obligation.
Disclaimer
This article provides general information about the UK redundancy payment rules and US-UK tax compliance. Furthermore, it does not constitute tax advice for any specific person or situation. Consequently, you should not act on this content without professional guidance addressing your own circumstances.
Tax rules change frequently, and the figures cited reflect the position for 2026/27 as at August 2026. Additionally, individual circumstances vary considerably in cross-border matters. Therefore, please contact TaxYork or another qualified specialist before signing a settlement agreement or making decisions about a termination package.