Redundancy money arrives with a question attached: what’s the best thing to do with it — invest it, or keep it safe in the bank?
Neither, to start with. Until you’re earning again, this isn’t spare money.
A redundancy payout isn’t a windfall. It’s your salary, paid all at once.
So treat it like salary. Its first job is paying the bills between this job and the next one, and only the money left over after that gets to think about anything longer-term.
Work out how much has to stay in the bank
The usual rule is three to six months of essential bills in cash. After a redundancy you’re allowed more — six to twelve months, in the best easy-access account you can find. Job hunts run longer than anyone plans for, and money you might need in March cannot be somewhere that might fall 20% in February.
That’s not being timid. That’s the money doing the exact job it was paid to you for. Nobody should talk you out of it — including the part of you that’s itching to do something cleverer with it.
What’s tax-free and what isn’t
The first £30,000 of a redundancy payment is tax-free. No income tax, no National Insurance. Statutory redundancy pay can’t come to more than £22,530 under the 2026/27 rules, so if statutory is all you’re getting, none of it is taxed.
Two things catch people on bigger packages. Notice pay — whether you work it or get paid in lieu — is ordinary salary and taxed like it, whatever the size of the deal. And everything above £30,000 is taxed at your normal rate: £15,000 over the line costs a higher-rate taxpayer £6,000.
There’s one way round that worth knowing. Your employer can pay some or all of the amount above £30,000 straight into your pension instead. Paid that way, no income tax comes off it first — the full amount goes in and gets invested, within the £60,000 annual pension allowance. The catch is timing: it has to be agreed before the payment is made, not fixed afterwards. If your package is over £30,000, talk to payroll this week, not after payday.
What to do with the rest
Once the living money is parked and the tax is sorted, what’s left is ordinary money and follows the ordinary rules — split it by what each pound is for: spending, safety, growth, with the growth money in a stocks and shares ISA holding a boring index fund.
And if the market is at a record high the week you’re ready — that’s not the reason to wait it feels like.
The expensive fortnight
The costly mistakes all happen early: investing money in week one that turns out to be next April’s mortgage payment, or freezing completely and leaving the whole payout in the current account for two years because every option felt like a gamble. I’ve written about that freeze — it’s fear doing the deciding, and the way past it is the split above. Once each pound has a purpose, none of the decisions need nerve.
The payout’s first job is to pay you until someone else does.
This is what I write about every week — managing your own money without paying someone 1–2% a year to do it worse. The letter is free.
I am not a financial adviser. Nothing here is personal financial advice. This is my own experience and opinion, shared for information and education. Tax treatment depends on your circumstances and rules change. Investing involves risk — the value of investments can fall as well as rise, and you may get back less than you put in. Please do your own research before acting.