Losing your job is hard enough without a surprise tax bill. The good news is that if your termination qualifies as a genuine redundancy, a generous chunk of your payout can be completely tax-free in Australia — for the 2025–26 financial year, the tax-free limit is $13,100 plus $6,552 for every completed year of service. But not every part of a redundancy package gets that treatment, and the excess is taxed under a special set of rules. This guide breaks down exactly how redundancy pay tax works in Australia, with worked examples, the 2025–26 figures, and what to check before you sign your final paperwork. Want a quick estimate first? Try the free redundancy pay calculator.
What counts as a genuine redundancy payment?
A “genuine redundancy” is a specific tax concept, and it is stricter than simply being told your job is gone. For your payment to qualify, all of the following must apply:
- Your job was abolished. The employer decided the role no longer exists and no one else is doing it — you were not simply replaced or pushed out for another reason.
- You are under age pension age. That is 67 for most Australians (those born on or after 1 January 1957). If you are 67 or older at the time of dismissal, the payment cannot be a genuine redundancy for tax purposes.
- The employer made the decision. The termination must be at the employer’s initiative. You quitting voluntarily, even under pressure, does not qualify — although an employer-initiated voluntary redundancy program can qualify.
The following situations are not genuine redundancies for tax purposes:
- Dismissal for misconduct, poor performance, or inefficiency
- Reaching normal retirement age or a mandatory retirement clause in your contract
- A fixed-term contract simply ending
- Voluntary resignation where you initiated the departure
- Termination on or after reaching age pension age
If your payment does not meet the genuine redundancy criteria, the whole amount is treated as a standard employment termination payment (ETP) — no tax-free limit applies, though concessional ETP tax rates still do (see below).
The tax-free limit formula for 2025–26
For a genuine redundancy, the tax-free amount is calculated with a simple formula set by the ATO each financial year:
Tax-free amount = $13,100 + ($6,552 × completed years of service)
Only completed full years count. If you worked 7 years and 11 months, only 7 years are used — part years are ignored. The figures are indexed to wages growth on 1 July each year, so always use the current year’s amounts.
| Years of continuous service | 2025–26 tax-free limit |
|---|---|
| 1 year | $19,652 |
| 3 years | $32,756 |
| 5 years | $45,860 |
| 8 years | $65,516 |
| 10 years | $78,620 |
| 15 years | $111,380 |
| 20 years | $144,140 |
That tax-free portion is not included in your assessable income at all — your employer reports it as a tax-free lump sum (Lump Sum D), and you pay zero tax on it.
Worked example: 8 years of service, $60,000 redundancy payment
Say you have worked for your employer for 8 completed years and receive a genuine redundancy payment of $60,000.
- Step 1 — work out the tax-free limit: $13,100 + ($6,552 × 8) = $13,100 + $52,416 = $65,516.
- Step 2 — apply it to the payment: your $60,000 payment is entirely under the $65,516 limit.
- Result: the full $60,000 is tax-free, and the taxable remainder is $0.
Now consider a second example where the payment exceeds the limit. After 8 years of service you receive a $100,000 redundancy payment:
- Tax-free portion: $65,516 (the limit above).
- Taxable remainder: $100,000 − $65,516 = $34,484.
- That $34,484 is taxed as an employment termination payment (ETP). If you are under preservation age (60), your employer withholds a flat 32% ($11,035) from it; if you have reached preservation age, the withholding rate is 17% ($5,862). No part of it is taxed at your normal marginal rate.
Want to run your own numbers? The redundancy pay calculator estimates both your statutory redundancy entitlement and the tax-free component.
How the taxable excess is taxed: ETP caps and rates
Any amount of a genuine redundancy payment above the tax-free limit becomes a life-benefit employment termination payment and is concessionally taxed up to the ETP cap, which is $260,000 for 2025–26 (indexed annually). The tax rates, including the Medicare levy, are:
| Portion of the taxable ETP | Under preservation age (under 60) | Preservation age or over |
|---|---|---|
| Up to the $260,000 ETP cap | 32% | 17% |
| Above the $260,000 ETP cap | 47% | 47% |
Three important details:
- The ETP cap is reduced by earlier ETPs. If you already received another ETP in the same income year, or an earlier ETP for the same termination, the cap available to you shrinks accordingly.
- The 12-month rule. Concessional ETP treatment only applies to payments made within 12 months of your employment ending. Amounts paid later are taxed at your marginal rates instead.
- Preservation age is 60 for anyone born on or after 1 July 1964, and it is measured at the end of the financial year in which you receive the payment.
Non-genuine redundancy: the whole-of-income cap
For payments that are not genuine redundancies — golden handshakes, severance pay, gratuities, payment in lieu of notice, unused sick leave and unused rostered days off — the same 32%/17%/47% rates apply, but the concessional rate only runs up to the smaller of the ETP cap ($260,000) and the whole-of-income cap. The whole-of-income cap is $180,000 minus your other taxable income in that financial year (it is not indexed). So if you earn $100,000 in wages elsewhere in the year, only $80,000 of such an ETP gets the concessional rate; the rest is taxed at the top marginal rate of 45% plus the 2% Medicare levy (47% in total). Your employer indicates this on your income statement with ETP code O or P.
What does NOT get the tax-free treatment
A redundancy payout is rarely a single lump sum for tax purposes. Each component is taxed differently, and only the genuine redundancy component enjoys the tax-free limit. Ask your employer for an itemised breakdown and check each line:
- Unpaid salary and wages: taxed at your normal marginal rates, reported as salary and wages.
- Payment in lieu of notice: an ETP (not genuine redundancy), so it is subject to the whole-of-income cap — 32% or 17% up to the cap, 47% above it.
- Unused annual leave: on a genuine redundancy, taxed at a flat 32% (including Medicare levy) and reported as Lump Sum A — regardless of when it accrued.
- Unused long service leave: depends on when it accrued:
Accrual period Tax treatment on genuine redundancy Before 16 August 1978 5% assessable at marginal rates (Lump Sum B) 16 August 1978 – 17 August 1993 32% flat (Lump Sum A) After 17 August 1993 32% flat (Lump Sum A) - Unused sick leave: not part of the genuine redundancy payment — treated as an ETP subject to the whole-of-income cap.
- Superannuation contributions: generally no super guarantee is payable on the genuine redundancy component itself, but super is payable on payment in lieu of notice and unused annual leave, as these count as ordinary time earnings.
Statutory redundancy pay: the minimum you are owed
Separate from tax, the National Employment Standards (NES) set the minimum redundancy pay most employers must provide, based on your base weekly pay (annual base salary ÷ 52, excluding bonuses, allowances and super):
| Continuous service | Minimum redundancy pay |
|---|---|
| 1–2 years | 4 weeks |
| 2–3 years | 6 weeks |
| 3–4 years | 7 weeks |
| 4–5 years | 8 weeks |
| 5–6 years | 10 weeks |
| 6–7 years | 11 weeks |
| 7–8 years | 13 weeks |
| 8–9 years | 14 weeks |
| 9–10 years | 16 weeks |
| 10+ years | 12 weeks |
Businesses with fewer than 15 employees are generally exempt from NES redundancy pay (though some awards and agreements override this), and your award, enterprise agreement or contract may be more generous — always check it first. For a $100,000 salary with 8 years of service, the NES minimum is roughly $26,923 (14 weeks at $1,923 per week); compare that against the after-tax breakdown of a $100,000 salary to put the payout in context.
Checklist before you sign your final paperwork
- Get an itemised breakdown. Never assume the whole payout is tax-free — genuine redundancy, leave, and notice pay are taxed separately.
- Confirm your years of service. Only completed years count toward the tax-free limit; part years are ignored.
- Check your age position. Under 67 for the genuine redundancy tax-free limit, and under/over 60 for the ETP withholding rate — the difference between 17% and 32% is significant.
- Watch the timing. Payments made more than 12 months after termination lose concessional ETP treatment.
- Consider the whole-of-income cap. If you start a new job in the same financial year, non-genuine components may attract more tax at return time.
- Keep your paperwork. Your income statement or PAYG payment summary shows ETP codes (R for genuine redundancy excess, O or P where the whole-of-income cap applies) — you will need it at tax time.
Frequently asked questions
Is redundancy pay tax-free in Australia?
Partly. A genuine redundancy payment is tax-free up to the ATO limit — $13,100 + $6,552 per completed year of service in 2025–26. Amounts above that limit are taxed concessionally as an employment termination payment, and other components like unused leave and payment in lieu of notice have their own tax treatment.
How much is the redundancy tax-free limit for 10 years of service?
For 2025–26, 10 completed years gives a tax-free limit of $13,100 + ($6,552 × 10) = $78,620. Any genuine redundancy payment at or below that figure is entirely tax-free.
What is the ETP cap for 2025–26?
The life-benefit ETP cap is $260,000 for 2025–26. The taxable component of a genuine redundancy payment is taxed at 32% (under preservation age) or 17% (at or over 60) up to this cap, and 47% above it. The whole-of-income cap of $180,000 also applies to non-genuine payments such as golden handshakes and payment in lieu of notice.
Is unused annual leave taxed when I am made redundant?
Yes, but concessionally. Unused annual leave paid on a genuine redundancy is withheld at a flat 32% (including the Medicare levy) and reported as Lump Sum A — it is not added to your marginal-rate income. Note that if you resign or are dismissed for other reasons, post-1993 accrued leave is instead taxed at your marginal rates.
Do I get superannuation on my redundancy payment?
Super guarantee is generally not payable on the genuine redundancy component itself. However, it is payable on payment in lieu of notice and unused annual leave, because these count as ordinary time earnings.
What if my redundancy payment is paid in the next financial year?
The ATO applies the tax-free limit for the financial year in which the payment is received, and concessional ETP rates only apply to payments made within 12 months of your termination. Delayed payments may be taxed at your marginal rates, so clarify timing with your employer.
Conclusion
A genuine redundancy in Australia comes with one of the most generous tax concessions available to employees: a tax-free limit of $13,100 plus $6,552 per completed year of service in 2025–26, with the excess taxed at flat concessional ETP rates of 32% or 17% up to the $260,000 ETP cap. The catch is that leave payouts, payment in lieu of notice, and wages each follow their own rules — so always work from an itemised breakdown rather than the headline figure. Before you sign anything, run your figures through the free redundancy pay calculator to see your statutory entitlement, your tax-free limit, and the likely tax on the rest — then talk to a registered tax agent if your package is complex or unusually large.