Is my UK redundancy payment taxable in the US if HMRC made the first 30,000 pounds tax free?

Yes, in full. The United States taxes citizens on worldwide income and has no equivalent of the section 403 ITEPA 2003 exemption. IRS Publication 525 requires severance pay and any payment for the cancellation of an employment contract to be included in income. The tranche HMRC exempts is fully taxable on Form 1040, and because no UK tax was paid on it, no foreign tax credit attaches to that slice. The treaty does not help either, because the saving clause preserves the US right to tax its own citizens.

How much statutory redundancy pay can I actually receive, and why does the cap matter for my US return?

GOV.UK sets the entitlement at half a week's pay for each full year of service under 22, one week for each full year aged 22 to 40, and one and a half weeks for each full year aged 41 or over, with service capped at 20 years, a week's pay capped at 751 pounds and a maximum statutory payment of 22,530 pounds for redundancies on or after 6 April 2026. For a senior professional the statutory element is therefore small, so the 30,000 pound exemption is consumed mainly by the enhanced or ex gratia layer. That tells you how much untaxed foreign source income will land on your US return.

Does post-employment notice pay apply to statutory redundancy pay?

No. HMRC's EIM13760 confirms that statutory redundancy payments, and approved contractual payments to the extent exempted by section 309 ITEPA 2003, are not within the definition of a relevant termination award, and GOV.UK states directly that statutory redundancy is not subject to post-employment notice pay calculations. Only the excess of a contractual scheme over the statutory amount is a relevant termination award. Post-employment notice pay is charged as general earnings and gets no share of the 30,000 pound threshold.

Should I claim the foreign earned income exclusion or the foreign tax credit on a redundancy year?

Run both and compare, because on senior packages the credit usually wins. The exclusion is capped at 132,900 US dollars for 2026, it is consumed by salary before it reaches the redundancy payment, it is prorated by qualifying days where the qualifying period ends mid-year, and no foreign tax credit is available for UK tax on income excluded from US gross income. Excluding income therefore removes creditable UK tax from Form 1116 at precisely the moment you need it to cover the exempt tranche.

How do I source a redundancy payment if I worked outside the UK for part of my career?

The IRS time basis multiplies the total payment by days services were performed in the United States over total days of service, with an alternative basis permitted where you can support that it more correctly reflects the source. Redundancy makes the denominator contentious, because statutory redundancy is measured by capped years of service rather than by a service period, while HMRC generally sources a termination payment as the remuneration it replaces. Choose a basis, document the reasoning, keep a workday calendar, and apply it consistently across both filings.

What if my redundancy is paid in instalments after I leave the UK?

Two rules bite. First, the IRS states that payments received after the end of the tax year following the tax year in which the services were performed do not qualify as foreign earned income, so late instalments can fall outside the exclusion entirely and leave the foreign tax credit as the only relief. Second, instalments straddling 5 April are settled across two UK returns while the US return needs the whole picture in one calendar year, which is what makes the accrual basis election for the foreign tax credit worth considering before you file.

US Tax on a UK Redundancy Payment: Expat Filing Guide

US tax on a UK redundancy payment begins with an answer most senior leavers find counter-intuitive: the entire payment is taxable in the United States, including the tranche HMRC deliberately exempts. Section 403 ITEPA 2003 allows the first 30,000 pounds of a qualifying termination award to escape UK income tax. The Internal Revenue Code contains no equivalent. IRS Publication 525 states that you must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract, and draws no distinction based on whether another country has already relieved part of it. A US citizen made redundant from a London role therefore reaches the filing season with a package Britain taxed in part and America taxes in full, and an exempt slice reaching Form 1040 with no UK tax to credit against it. That slice, not the headline figure, decides whether there is a balance due.

This article deals with redundancy alone. The wider anatomy of a settlement agreement, meaning restrictive covenant payments, deferred cash, share awards vesting on exit and employer-paid legal fees, is set out in our article on US tax return preparation for expats and UK termination payments. What follows goes narrower: how the statutory redundancy formula and its caps fix the size of the untaxed tranche, why an enhanced scheme behaves differently from a statutory one, why post-employment notice pay cannot touch statutory redundancy, and why the foreign earned income exclusion is frequently the wrong instrument in the year an employment ends.

How does US tax on a UK redundancy payment differ from the UK treatment?

The two systems disagree on legal character, not merely rate. HMRC treats a genuine redundancy payment as compensation for the loss of a job. The IRS treats it as pay for having done the job.

HMRC's Employment Income Manual at https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13750 confirms that statutory redundancy payments are always chargeable to income tax as specific employment income, and are not earnings within section 62 ITEPA 2003, following Mairs v Haughey. They are charged under section 401 and relieved by section 403, which EIM13505 states allows relevant payments and benefits to count as employment income only to the extent that they exceed 30,000 pounds. GOV.UK puts it plainly at https://www.gov.uk/termination-payments-and-tax-when-you-leave-a-job/what-you-pay-tax-and-national-insurance-on: you do not usually pay tax on the first combined 30,000 pounds of statutory redundancy pay, additional severance or enhanced redundancy payments, and non-cash benefits, with the employer paying Class 1A National Insurance on the excess.

On the US side there is nothing to argue about. A redundancy payment is compensation, reported as wages, sitting in the general category for foreign tax credit purposes and taxed at your marginal rate. Four consequences follow, and they shape the whole return.

The UK exemption is a domestic relief. It reduces UK tax, not US gross income, and it cannot be imported through the treaty, because the saving clause preserves the United States' right to tax its own citizens.
Every pound the UK exempts is a pound of foreign source income reaching Form 1040 with a zero in the foreign tax column, diluting the effective foreign rate on your general category basket for the whole year.
The character distinctions that matter to HMRC are irrelevant to the IRS. They matter to your US return only because they determine how much UK tax was actually paid, and therefore how much credit exists.
The exempt tranche is fixed by statute and by the shape of your package, not by negotiation, so its size and its US cost are calculable from the offer letter.

Statutory, approved contractual, or enhanced: which redundancy are you actually being paid?

Almost every published guide treats redundancy pay as one thing. It is three, and only one behaves the way most articles describe. Classification is the first step in preparing the US return, because it fixes how much UK tax attaches to each layer.

Statutory redundancy pay. The minimum compensatory payment mandated by the Employment Rights Act 1996. It is charged as specific employment income, counts towards the combined 30,000 pound threshold, and is almost always exempt in full because the statutory maximum sits well below that threshold.
Approved contractual payments. A contractual scheme approved under section 309 ITEPA 2003. EIM13750 confirms these are treated as statutory payments are, and EIM13760 at https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13760 confirms they sit outside the definition of a relevant termination award to the extent section 309 exempts them.
Enhanced, ex gratia or non-statutory redundancy. Everything paid above the statutory or approved figure. EIM13760 is explicit that only that excess is a relevant termination award. This is the layer subject to post-employment notice pay analysis, the layer consuming almost all of the threshold in a senior package, and the layer generating real UK tax.

For an investment banker or senior professional, the enhanced layer is the package and the statutory layer is a rounding error. That asymmetry is why the US answer differs from the one general guidance implies.

Why the statutory caps decide the size of your US problem

Statutory redundancy pay is not a percentage of salary. It is a formula built on age and completed service, and every input is capped. GOV.UK sets it out at https://www.gov.uk/redundancy-your-rights/redundancy-pay: half a week's pay for each full year of service under age 22, one week's pay for each full year aged 22 to 40, and one and a half week's pay for each full year aged 41 or over. Length of service is capped at 20 years, a week's pay is capped at 751 pounds, and the maximum statutory redundancy payment is 22,530 pounds, for redundancies on or after 6 April 2026.

Read those caps against a package for someone earning several hundred thousand pounds. A director aged 48 with 15 years of service has a statutory entitlement computed on 751 pounds a week rather than actual pay, so the statutory element consumes only part of the threshold. The remainder is soaked up by the enhanced or ex gratia layer, and everything above it is taxed at higher or additional rates.

That arithmetic runs opposite to intuition. The larger the package, the smaller the untaxed tranche as a proportion of the whole, and the more creditable UK tax exists to cover the US charge. The dangerous file is not the enormous package. It is the modest one, or the one where the exit falls early in the calendar year, because there the exempt 30,000 pounds is a large fraction of the total and little UK tax arises on the rest of the year to absorb it. A fully exempt tranche taxed at a 37 percent US marginal rate is a real liability on money the client was told was tax free.

Does post-employment notice pay apply to a redundancy payment?

Not to the statutory element, and this is a redundancy-specific carve-out that general termination guidance routinely misses. Post-employment notice pay is the statutory measure of unworked notice, computed under section 402D ITEPA 2003, and charged as general earnings with no share of the 30,000 pound threshold. EIM13760 states that statutory redundancy payments, and approved contractual payments to the extent exempted by section 309, are not within the definition of relevant termination awards. GOV.UK repeats the point: statutory redundancy pay is not subject to post-employment notice pay calculations.

The practical effect is that a genuine redundancy can preserve a larger exempt tranche than an ordinary negotiated exit, because the notice pay formula cannot reach the statutory layer. HMRC still aggregates all payments in respect of the termination, excluding post-employment notice pay, in applying the threshold. For the US return the consequence is uncomfortable: the better the UK outcome, the larger the block of untaxed foreign source compensation on Form 1040. A payment in lieu of notice, by contrast, is taxed in the UK in full with Class 1 National Insurance and is ordinary wages in the United States, so it carries the creditable tax doing the work in your Form 1116.

Is a UK redundancy payment foreign earned income for the exclusion?

Here the redundancy analysis departs from the standard severance discussion. The IRS defines foreign earned income at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-what-is-foreign-earned-income as income received for services performed in a foreign country while your tax home is abroad and you meet the bona fide residence or physical presence test, including wages, salaries, bonuses and professional fees. An enhanced or ex gratia severance payment, negotiated by reference to salary and seniority, sits comfortably within that definition.

Statutory redundancy pay is a harder fit, and we have found no IRS pronouncement addressing it by name. It is not measured by services performed in any period. It is measured by age bands and completed years of service, capped at a weekly figure bearing no relation to actual pay, and it exists as a statutory entitlement rather than as remuneration for work. The defensible position, and the one we take, is that it remains compensation attributable to an employment carried on abroad, documented and applied consistently across the exclusion, sourcing and credit computations rather than assumed in one and contradicted in another.

One timing rule bites regardless of characterisation. The IRS states at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion that payments received after the end of the tax year following the tax year in which the services were performed do not qualify as foreign earned income. Packages paid in tranches, or held back pending a restrictive covenant period, can drift outside that window. The exclusion is then unavailable however many qualifying days you had, and the foreign tax credit becomes the only relief, which makes the sourcing analysis decisive.

The exclusion trap in the year you are made redundant

Most general guidance stops at the observation that severance counts towards the foreign earned income exclusion, and implies the problem is solved. On a senior redundancy file it usually is not, for four compounding reasons.

The exclusion is capped and the package is not. The IRS confirmed in its tax year 2026 inflation adjustments that the maximum exclusion is 132,900 US dollars for 2026, up from 130,000 US dollars for 2025. A package of several hundred thousand pounds passes that ceiling long before the redundancy element is reached.
The exclusion is consumed by salary first. It applies to foreign earned income as a whole, not to a chosen slice, so nine months of a senior London salary typically exhausts the annual limit on its own.
The exclusion is prorated when the qualifying period ends. The IRS explains at https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion that you multiply the maximum exclusion by qualifying days in the year and divide by 365, or 366 in a leap year.
The exclusion destroys credit. No foreign tax credit is available for foreign tax on income excluded from US gross income, so UK tax must be apportioned and the excluded portion stripped out of Form 1116. In a redundancy year that is backwards: you remove creditable UK tax exactly when you need it to cover the untaxed tranche.

On most senior redundancy files the foreign tax credit alone beats the exclusion. That is a computation to run both ways before filing, not a default. It also carries a procedural consequence, because revoking an exclusion election bars you from claiming it again for the following five tax years without IRS consent, so a revocation made to solve a redundancy year must be tested against the years that follow.

How is a redundancy payment sourced when the role spanned several countries?

Sourcing determines how much of the payment is foreign source income, and only foreign source income can carry a foreign tax credit. The IRS sets out the time basis at https://www.irs.gov/individuals/international-taxpayers/source-of-income-personal-service-income: US source income equals total pay multiplied by days services were performed in the United States over total days of service, with an alternative basis permitted where you can support that it more correctly reflects the source. Where or how you are paid has no effect on the source.

Redundancy exposes a structural awkwardness in that fraction. The time basis needs a service period as its denominator, and statutory redundancy has no service period. It has a service length, capped at 20 years, used purely as a multiplier. An enhanced payment negotiated as a multiple of salary has a natural denominator in the recent employment period; a statutory payment computed on capped years does not. A partner who spent three years in New York within a 25-year career gets materially different answers depending on whether the denominator is total service, the capped 20 years, or the final 12 months.

There is a second layer. HMRC's practice is to source a termination payment as the remuneration it replaces, which for contractual amounts generally means the final period of employment, while the IRS time basis looks at the whole period over which the compensation was earned. Two authorities can therefore measure different denominators over the same payment. Choose a basis, document why it more correctly reflects the source, and apply it on both returns.

Foreign tax credit mechanics when the UK taxed only part of the payment

A redundancy payment is compensation for personal services, so it and the UK income tax on it fall in the general category basket on Form 1116. The IRS confirms at https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit that generally only income, war profits and excess profits taxes qualify, that the credit is computed separately for each category, and that unused foreign taxes carry back one year and forward ten years within the same category.

The exempt tranche adds foreign source general category income with no attached foreign tax, raising the numerator of the section 904 limitation fraction and with it the US tax on foreign source income that your existing UK tax must cover. The blended effective foreign rate on the general basket falls, and if it falls below the US rate applied to that basket, residual US tax arises. The one-year carryback is the live lever and it is under-used: where the redundancy year is the low-tax year, excess general category credits from the preceding year of full UK salary can be carried back to meet it, but that must be identified before the prior year is closed out.

A worked scenario

The following figures are illustrative only and are not a client case. Assume a US citizen, UK resident throughout, aged 48, made redundant from a senior London role in September after 15 years of service on a base salary of 250,000 pounds. The terms provide statutory redundancy pay computed on the capped week's pay, a contractual enhanced redundancy payment of 220,000 pounds, and a contractual payment in lieu of notice of 62,500 pounds. Assume an illustrative exchange rate of 1.30 US dollars to the pound.

In the UK, the payment in lieu of notice is general earnings, taxed in full with Class 1 National Insurance and no share of the threshold. Because a contractual payment covering the whole unworked notice period has been made and taxed, the post-employment notice pay formula produces nil, and the statutory element is not a relevant termination award in any event. The statutory and enhanced amounts are aggregated, the first 30,000 pounds falls outside the charge under section 403, and the balance is taxed at the additional rate with employer Class 1A National Insurance on the excess.

In the United States, the statutory element, the enhanced 220,000 pounds and the 62,500 pound payment in lieu of notice are all compensation income, alongside nine months of salary. Nothing is exempt. Around 30,000 pounds of it, some 39,000 US dollars, sits in the Form 1116 numerator with a zero in the tax column. Because the exit is in September, nine months of additional-rate UK tax on salary plus additional-rate tax on the taxable balance of the package normally keeps the blended general category rate above the US rate, and the tranche is absorbed. Move the same facts to February and the position reverses: far less UK tax has been paid, the exempt tranche is a much larger share of the total, and a residual US liability is likely. The exclusion rescues neither version, because salary alone exhausts the annual limit.

National Insurance, US social security, and what is not creditable

Employee National Insurance does not apply to the qualifying termination award, and employer Class 1A National Insurance applies above the threshold, as GOV.UK confirms and as HMRC's National Insurance Manual reflects at https://www.gov.uk/hmrc-internal-manuals/national-insurance-manual/nim02600. Class 1 National Insurance applies in full to the earnings elements, including any payment in lieu of notice. None of it is creditable, because National Insurance is not an income tax and does not enter Form 1116. Separately, no US social security or Medicare charge arises where you are covered by the UK system under the bilateral totalization agreement, explained by the IRS at https://www.irs.gov/individuals/international-taxpayers/totalization-agreements. Keep the certificate of coverage, because a consultancy engagement taken up after the redundancy raises self-employment tax as a fresh question.

The UK tax year and US calendar year straddle

The UK tax year ends on 5 April and the US tax year ends on 31 December, so a redundancy paid in February is taxed by HMRC in a UK year ending weeks later while the US return covering it does not close for another ten months. Instalments straddling 5 April are settled across two UK returns while the US return needs the whole picture in one calendar year. That drives the accrual basis election for the foreign tax credit. A cash basis taxpayer claims the credit in the year the foreign tax is paid, which on a spring redundancy strands income in one US year and the matching UK tax in the next. The accrual basis lines the UK tax up with the year the income arises, but the election binds later years. Where PAYE has over-withheld, a UK repayment requires the US credit to be redetermined.

How a UK redundancy payment lands on your US return

The full package, statutory and enhanced alike, is reported as wages on Form 1040, translated into US dollars on a consistent basis.
Any exclusion claimed goes on Form 2555, prorated by qualifying days where the qualifying period ends during the year, and only after testing whether it costs more in lost credit than it saves.
The UK income tax supports a Form 1116 in the general category, filed alongside any separate Form 1116 for passive investment income, with UK tax allocable to excluded income stripped out.
Any carryback of excess general category credits is identified and quantified before the prior year is finalised.
The workday record, the employer's calculation of each element, the redundancy notice and the payroll breakdown showing what went through PAYE are retained on file.
The proceeds trigger their own reporting once banked: FinCEN Form 114 where the aggregate maximum balance test is met, and Form 8938 where the specified foreign financial asset thresholds are met.

This is compliance work, done properly by mapping the redundancy terms before the money moves rather than reconstructing them from a P45 two seasons later. Our US filing work is at https://us-uktax.com/us-tax-services, the UK side at https://us-uktax.com/uk-tax-services, and the full range at https://us-uktax.com/services. If you are holding a redundancy letter and a US passport, establish first how much HMRC will exempt, because that is the figure the IRS will tax with no credit behind it.