Is redundancy pay taxed?

How much of a redundancy payment is tax-free in 2026-27

The tax-free amount is worked out with a simple formula: a base amount, plus a set amount for every completed year you worked for that employer. The ATO publishes both figures and indexes them on 1 July each year, so the limit that applies depends on the income year you receive the payment.

The table shows the 2026-27 limit for some common lengths of service.

Only whole years count. If you worked somewhere for 7 years and 11 months, your limit is calculated on 7 years, which for 2026-27 is $13,598 plus 7 times $6,801, or $61,205. The tax-free amount can also only be used once for any one redundancy, even if your employer pays you in instalments.

If your redundancy payment is below your limit, none of it is taxed. When you're receiving only the minimum redundancy pay under the National Employment Standards, the limit will usually cover it unless your base pay is high.

Which parts of your payout the limit covers

The tax-free limit only applies to payments made because your job was made redundant. According to the ATO's guidance on genuine redundancy payments, that can include:

• severance pay, meaning a number of weeks' pay for each year of service
• payment in lieu of notice
• a gratuity or "golden handshake"

It doesn't include wages you're still owed for work already done, lump sum payments for unused annual leave or leave loading, unused long service leave, or payments made instead of superannuation.

There's one more adjustment that can catch people out. If your contract or agreement would have paid you something anyway had you resigned, that amount isn't treated as part of the genuine redundancy payment. The ATO's ruling on genuine redundancy calls this the voluntary termination element. It's taxed as an ETP instead, so only the extra you receive because of the redundancy counts towards the tax-free amount. Most employees don't get a lump sum just for resigning, so for many people this adjustment is zero.

When a redundancy counts as genuine for tax purposes

The tax-free treatment depends on the payment meeting the conditions in section 83-175 of the Income Tax Assessment Act 1997, which is a separate test from whether a redundancy is genuine for unfair dismissal purposes. In practical terms, your employer must have ended your employment because your position is no longer needed, and:

• you were dismissed before you reached Age Pension age, which is currently 67
• your employment wasn't simply ending at a set date, such as the end of a fixed-term contract or a compulsory retirement age
• there was no arrangement for you to be employed again by the employer, or by someone else through the employer, after the dismissal
• if you and your employer aren't dealing at arm's length (for example, in a family business), the payment isn't larger than an arm's length employer would pay

A payment won't be a genuine redundancy if you resign, retire, reach the end of a contract, or are dismissed because of your performance or conduct. In those cases the whole payment is taxed as an ETP, with no tax-free part.

Calling a payment a redundancy doesn't settle the question on its own. The ATO looks at the facts, and its ruling says an agreement between employer and employee that a payment is for redundancy isn't enough to make it one.

Voluntary redundancy and reshaped roles need a closer look. If you put your hand up for a voluntary redundancy, the ruling says there can still be a dismissal, as long as the employer started the process and made the final decision about whose jobs would go.

If your role is being reshaped rather than abolished, for example with fewer hours on different days, a genuine redundancy may still be possible. In February 2026 the Full Federal Court found that a part-time worker who turned down redeployment into roles with materially fewer hours and less pay, and took a redundancy instead, had received a tax-free genuine redundancy payment. The ATO's decision impact statement accepts that a material cut in hours can be relevant, but stresses that each case depends on its own facts, and the ATO is reviewing its ruling as a result.

How the amount above the limit is taxed

Whatever is left of a genuine redundancy payment after the tax-free amount is an ETP. The ATO explains how ETP components are taxed: up to a cap, the rate is 32% if you're under your preservation age and 17% if you've reached it. Both rates include the Medicare levy. Preservation age is 60 for anyone born after 30 June 1964, and anyone born before that date has already reached it.

For 2026-27, the ETP cap is $270,000. Any part of the taxable amount above the cap is taxed at the top marginal rate of 45%, plus the 2% Medicare levy.

Non-genuine redundancy payments are treated less generously. As well as having no tax-free part, they're subject to a second cap, the whole-of-income cap of $180,000, which is reduced by your other taxable income for the year. Whichever cap is smaller applies. This means your salary earlier in the year can shrink the amount that gets the concessional rate, which doesn't happen with the excess from a genuine redundancy.

You can't roll an ETP over into your super fund to reduce the tax on it.

Two examples

These are hypothetical situations using the 2026-27 figures, to show how the pieces fit together.

How unused annual leave and long service leave are taxed

Leave you've built up is paid out on top of any redundancy payment, and it's taxed separately. When you leave because of a genuine redundancy, unused annual leave, leave loading and long service leave are taxed at no more than 30% plus the Medicare levy, under sections 83-15 and 83-85 of the Income Tax Assessment Act 1997. If your marginal rate is lower than 30%, the lower rate applies when your tax return is assessed. Employers withhold 32% from these payments, according to the ATO's withholding schedule for unused leave.

The 30% cap makes a difference once your taxable income for the year, including the leave payout, goes above $135,000, where the 2026-27 marginal rate rises to 37%. By comparison, leave built up since August 1993 and paid out when you resign is usually taxed at your normal marginal rate, as if it were extra salary. Very old leave has its own rules: long service leave accrued before 16 August 1978 is only 5% taxable, but few people still working have any of that left. If you're working out how much long service leave you should be paid, our long service leave guide covers the state and territory rules.

Checking your final pay and tax return

The tax withheld from your final pay is an estimate, and the actual tax is worked out when you lodge your return for the year. Your employer reports each part of the payout separately on your income statement. The tax-free part of a genuine redundancy appears at "Lump sum D", and you don't include it in your tax return. Unused leave paid because of a genuine redundancy appears at "Lump sum A", with type code R, and any ETP is reported separately with its own tax withheld.

If you think your employer has treated a payment as a non-genuine redundancy when it should be genuine, or has used the wrong number of years of service, ask payroll to explain how they calculated it. When the two of you still disagree, you can apply to the ATO for a private ruling, which is binding advice on how the law applies to your circumstances. A registered tax agent can also help, particularly with a large payout or a situation like a reshaped role.

This article is general information about how redundancy payments are taxed, not advice about your own tax position.