Redundancy: the tax on your payout and what to do next
Redundancy is stressful enough without worrying about the tax. The good news is that genuine redundancy payments get favourable treatment. The important thing is to understand what you’ve been paid, check it’s been taxed correctly, and make good decisions about what to do with it.
What counts as a genuine redundancy
For the tax concessions, the redundancy must be genuine: your position no longer exists, you’re dismissed before your retirement age (generally 65), the arrangement is at arm’s length, and you don’t have an agreement to be re-employed. Resigning, being dismissed for performance, or a contract simply ending generally aren’t genuine redundancies.
How the payout is taxed
A redundancy payout usually has several parts, each taxed differently:
| Component | Tax treatment |
|---|---|
| Tax-free redundancy amount: a base amount plus an amount for each completed year of service | Tax-free |
| Employment termination payment (ETP): the redundancy amount above the tax-free limit, plus payments such as payment in lieu of notice | Concessional rate, generally 17% if you’re of preservation age or older, 32% if under, up to the ETP cap; above the cap, your marginal rate |
| Unused annual leave and leave loading | Maximum 32% (including Medicare) on genuine redundancy |
| Unused long service leave | Maximum 32% on genuine redundancy |
| Unused sick leave | Not usually paid out; if paid, taxed as an ETP |
| Normal salary to your final day | Marginal rates as usual |
The tax-free base and per-year amounts and the ETP cap are indexed each year, so check the current figures for your year [check: confirm the 2026–27 tax-free redundancy base and service amounts and ETP cap].
Your employer withholds tax on each part, and the payment summary shows the components. Check it carefully; mistakes do happen.
What to do with the money
Take a breath before making big decisions. Some things to consider:
- Keep a buffer. Set aside enough to cover living costs until you’re working again, plus a margin.
- Pay off high-interest debt such as credit cards and personal loans.
- Mortgage or offset. Putting money in an offset account reduces interest but keeps it available if you need it.
- Super. If you’re close to retirement, contributing some of the payout to super can make sense, within the concessional and non-concessional caps. A concessional contribution you claim a deduction for can reduce tax on other income in the same year.
- Timing of new work. Starting a new job in the same financial year as a large payout can push other income into a higher bracket. Starting near 1 July can help.
Centrelink
If you’re applying for JobSeeker or another payment, redundancy and leave payments can create an income maintenance period or a liquid assets waiting period before payments start. If you’re near Age Pension age, a payout put into savings or super affects the means tests. See how the Age Pension works.
Insurance
Check whether you had life, income protection or TPD cover through your employer or super, and what happens to it when you leave. Some cover ends with the job.
Starting a business instead?
Some people use a redundancy to start their own business. If that’s you, get the structure, ABN and GST set up properly from the beginning. See how to choose the right business structure.
Get advice before you act
A redundancy is often a once-in-a-career payment. We can check the tax on your payout and prepare your return, and Clarity Wealth’s financial planners can help you decide what to do with the money. See personal tax returns.