UK Redundancy Pay and US Tax: The £30,000 Exemption Gap

UK redundancy pay US tax treatment differs sharply from the UK position. The UK exempts the first £30,000 of a genuine redundancy payment from Income Tax. The US has no such exemption: a US citizen reports the whole payment on Form 1040 as wages. Relief comes from the Foreign Earned Income Exclusion or from foreign tax credits, including credits carried forward from earlier years, because little UK tax is paid on the exempt part.

Losing a job in Britain is stressful enough without a surprise from the IRS. Many Americans assume that a payment HMRC treats as tax-free must be tax-free everywhere. It is not. However, with the right approach, most or all of the US tax on a UK redundancy package can usually be removed. This guide explains the UK redundancy pay US tax position for each element of a package, and which relief works best. It covers employees; directors with their own companies face different rules.

How the UK taxes a redundancy package

A termination package usually contains several different payments, each taxed in its own way. GOV.UK summarises the rules on its redundancy pay page.

The £30,000 exemption

Under section 403 of the Income Tax (Earnings and Pensions) Act 2003, the first £30,000 of a qualifying termination payment is free of Income Tax. Statutory redundancy pay and genuine compensation for loss of employment count towards that limit. The amount above £30,000 is taxed as income at your marginal rate. It carries no employee National Insurance, although the employer pays National Insurance on the excess.

What is not exempt

Payments that are really earnings do not qualify. Pay in lieu of notice is taxed in full as earnings, whether or not your contract provides for it. Accrued holiday pay, unpaid salary and contractual bonuses are also fully taxable. Therefore, the headline figure in a settlement agreement is rarely all within the £30,000 exemption.

UK redundancy pay US tax treatment

The US taxes its citizens on worldwide income, and the Internal Revenue Code has no equivalent of the £30,000 exemption. Severance is treated as wages. You report the dollar value of the whole package on Form 1040 in the year you receive it.

Relief route 1: the Foreign Earned Income Exclusion

Severance paid for services performed abroad is foreign earned income. If you qualify under the bona fide residence or physical presence test, you can exclude up to $132,900 for 2026 on Form 2555 (IRS, 2026). The IRS explains the exclusion on its Foreign Earned Income Exclusion page.

The attribution rule

Earned income is attributed to the year in which the services were performed, not the year of payment. If a payment arrives in the year after the work, it can use any unused exclusion from the earlier year, provided you receive it by the end of the year following the one in which you did the work. Consequently, a redundancy payment received in January can sometimes be sheltered by the previous year's limit as well as the current one.

The catch

Many Americans in the UK use the foreign tax credit instead of the exclusion. If you revoked the exclusion in the past, you generally cannot claim it again for five years without IRS consent. Do not assume it is available in a redundancy year.

Relief route 2: foreign tax credits and carryovers

The foreign tax credit on Form 1116 offsets US tax with UK Income Tax paid. The difficulty is obvious: the first £30,000 bears no UK tax, so it generates no credit of its own.

Why carryovers usually solve it

In most cases, the answer lies in earlier years. A UK employee normally pays more UK tax than US tax on their salary, year after year. The surplus builds up as general category foreign tax credit carryovers, which last ten years. Redundancy pay is also general category income. As a result, those stored credits can be used against the US tax on the UK-exempt £30,000. This only works if the carryovers were tracked properly. Our guide to the foreign tax credit carryover and Schedule B explains how to check.

The year's own credits help too

In the redundancy year itself, salary earned before you left and any taxable part of the package both carry UK tax at up to 45%. Those credits are pooled in the same category, so the high UK rate on one part helps cover the untaxed part. Our foreign tax credit and double taxation page covers the pooling rules.

UK redundancy pay US tax timing across two tax years

The UK tax year ends on 5 April and the US year on 31 December. A payment in February falls in a different UK tax year from your final months of salary, but in a US year where you may have little other income. Where the timing is open to negotiation, it is worth modelling both dates. Our guide to the paid or accrued election explains how UK tax is matched to US years.

Using a pension contribution

Employers will often pay part of a package directly into your pension. In the UK, that avoids Income Tax on the amount contributed, within your annual allowance. For a US citizen resident in the UK, Article 18(5) of the UK-US Income Tax Treaty generally excludes employer contributions to a UK scheme from US income, up to the limits for a comparable US plan. This can reduce tax in both countries on the part of the package above £30,000. Our guide to UK pension contributions and Article 18 sets out the conditions.

An illustrative case

Consider an illustrative US citizen in Bristol made redundant in September 2026 after eight years. The figures are illustrative. Her package is £55,000 of compensation and £12,000 of pay in lieu of notice. The UK exempts £30,000, and taxes the remaining £25,000 and the notice pay. The US taxes all £67,000 as wages. She has always used the foreign tax credit and holds substantial general category carryovers. Those, with the UK tax on the taxable parts and on her 2026 salary, cover the US tax on the whole package. Without tracked carryovers, US tax would have been due on the exempt £30,000.

If you have been offered a settlement agreement, book a consultation with our US expat tax team before you sign. We model the UK redundancy pay US tax position, including timing and pension options.

Frequently Asked Questions

Is UK redundancy pay taxable in the US?

Yes. A US citizen or resident must report a UK redundancy payment on Form 1040 as wages. The UK's £30,000 exemption has no US equivalent, so the whole payment is taxable in the US, subject to the Foreign Earned Income Exclusion or foreign tax credits.

Does the £30,000 UK redundancy exemption apply for US tax?

No. The £30,000 exemption in section 403 of the Income Tax (Earnings and Pensions) Act 2003 is a UK rule only. The US taxes the exempt amount as ordinary wage income.

Can I use the Foreign Earned Income Exclusion on redundancy pay?

Generally yes, if you qualify. Severance for services performed abroad is foreign earned income, and up to $132,900 can be excluded for 2026 on Form 2555. If you previously revoked the exclusion, you usually cannot claim it again for five years without IRS consent.

How do foreign tax credits help if the UK charged no tax?

Unused general category foreign tax credits from the previous ten years can be carried forward and used against US tax on the redundancy payment. UK tax paid in the same year on salary and on the taxable part of the package is pooled in the same category.

Is pay in lieu of notice treated differently from redundancy pay?

In the UK, yes. Pay in lieu of notice is taxed in full as earnings, with Income Tax and National Insurance, and does not benefit from the £30,000 exemption. In the US, both are taxed as wages.

Can part of my redundancy package go into my pension?

Often yes. An employer contribution to your UK pension is generally free of UK Income Tax within your annual allowance. For a US citizen resident in the UK, Article 18(5) of the UK-US Income Tax Treaty generally excludes it from US income, within US limits.