Your Redundancy Pay and Your Tax-Free Limit Are Two Different Numbers

A redundancy meeting delivers two questions at once. The first is how large the redundancy pay will be. The second is how much of it will be kept after tax. Two different bodies answer those questions, and the answers are different numbers.

The position of this guide is as follows.

1. The Fair Work Act 2009 sets the minimum an employer must pay, as a scale of weeks at base pay.
2. The Australian Taxation Office (ATO) sets how much of whatever is paid is tax-free, as a base amount plus a further amount for each completed year of service. For 2026-27 that is $13,598 plus $6,801 per year.
3. The tax-free limit is headroom, never an entitlement. On a hypothetical annual base pay of $90,000, the legal minimum is between 22 and 38 per cent of the limit in every year of service from 1 to 12, and a smaller share again beyond year 12.

This is general information, not legal or financial advice. An award, an enterprise agreement or a contract can change the detail, and the figures below are pinned to the Fair Work Ombudsman (FWO) and ATO pages listed at the foot of this article, as recorded on 11 November 2026.

A job that no longer exists

The FWO describes redundancy as a feature of the position rather than the person. A job becomes redundant when the employer no longer needs anyone to do it, and the usual causes are new technology, slower sales, a closure, a relocation or a merger. The employee’s performance is not part of the test.

Redundancy pay under the National Employment Standards (NES) has three conditions, and all three must be met.

1. The employee has at least 12 months of continuous service with the employer.
2. The employee is covered by the national workplace relations system.
3. The employer has 15 or more employees, a point the next section returns to.

Unpaid leave does not count towards the service total, but it does not break continuity of service either. A period of unpaid leave therefore pauses the count without resetting it.

Rule one: the Fair Work scale sets the cheque

The NES scale is the statutory minimum, and it is expressed in weeks. The number of weeks depends on completed years of service at the date employment ends.

The final row is the one most readers do not expect. The scale climbs through every band to 16 weeks at nine years and then falls to 12 weeks at ten. The FWO states that this is consistent with the 2004 Redundancy Case decision. In practice, a person with ten completed years has a lower statutory minimum than a colleague with nine. On the hypothetical $90,000 used below, 16 weeks is $27,692 and 12 weeks is $20,769, a drop of $6,923.

Three further points govern the weeks.

1. The weeks are paid at the base rate for ordinary hours. The FWO states that this excludes incentive payments and bonuses, loadings, monetary allowances, overtime or penalty rates, and other separately identifiable amounts.
2. Not everyone is covered. The FWO lists employees with less than 12 months of service, employees engaged for a set period or season, employees dismissed for serious misconduct, most casuals, trainees (for the period of the training agreement), apprentices, and most employees of a small business.
3. Small business has a defined count. A small business employs fewer than 15 people, and the count includes all employees at the time, the person being made redundant, regular and systematic casuals, and employees of associated entities (Corporations Act 2001, s 50AAA).

The FWO also records a downsizing exception for an employer that is bankrupt or in liquidation, for redundancies on or after 15 December 2023, and a separate position where an industry redundancy scheme applies. Both are outside the scope of this guide, and the FWO page is the place to check them. Some awards carry their own industry schemes, and state public sector arrangements differ.

An employer may apply to the Fair Work Commission to reduce NES redundancy pay where it has found other acceptable work for the employee or cannot afford the payment. That power does not extend to an entitlement that comes from an award or an enterprise agreement.

Notice is a separate payment, at full pay

Notice of termination is a different entitlement from redundancy pay, and it is priced differently.

An employee over 45 with at least 2 years of service receives one further week. Where the employer pays instead of allowing the notice to be worked, the payment is at the full rate of pay, which includes loadings and penalty rates. The redundancy cheque, as the previous section noted, is calculated at the base rate. One week of notice and one week of redundancy pay can therefore carry different amounts for the same person.

A person with less than 12 months of service has no right to redundancy pay. Notice may still apply.

Rule two: the ATO sets what is tax-free

The ATO treats a payment as a genuine redundancy payment when three things are true: the job has been abolished, the employment has ended, and the person is under age pension age. A person who is at or over age pension age on the day of dismissal falls outside the concession.

Where the payment qualifies, the ATO allows part of it to be received tax-free. The limit for 2026-27 is a base amount of $13,598 plus $6,801 for each completed year of service. The ATO indexes the figures each 1 July. Material still printing $13,100 and $6,552 is quoting the 2025-26 figures.

The ATO states that a genuine redundancy payment may include a payment in lieu of notice, a severance payment calculated as weeks of pay per year of service, or a gratuity. The limit does not count salary owed, unused annual leave and leave loading, unused long service leave under a formal arrangement, or payments made in lieu of superannuation benefits. The guide to leave loading explains how that loading works, and its mechanics are not repeated here.

Anything above the limit is an employment termination payment (ETP). The ATO taxes an ETP concessionally up to the ETP cap, which is $270,000 for 2026-27. Within the cap the stated rate is 17 per cent for a person at or over preservation age and 32 per cent for a person under it. Above the cap the rate is 45 per cent plus 2 per cent Medicare. A whole-of-income cap of $180,000, which is not indexed, also applies to payments that are not excluded, and the ATO page sets out how.

The tax-free amount is not part of the ETP. The employer reports it as a lump sum on the income statement.

The two numbers side by side

The table below is our own calculation, not drawn from any award, agreement or payslip. Every row is hypothetical: an employee on annual base pay of $90,000 for ordinary hours, so a weekly base of $1,730.77 ($90,000 divided by 52), run through both rulebooks using the 2026-27 tax-free limit. NES pay is the NES minimum only, not what any award or agreement pays. Years are completed years, so a person at six years and eleven months is in the six-year row on both scales.

Three readings follow from the table.

1. The minimum is a fraction of the limit. Across all twelve years it ranges from 22 per cent to 38 per cent. The larger ATO figure is easy to mistake for the amount owed, and it is not that.
2. The two numbers move apart. The limit rises by $6,801 with every completed year. The NES weeks stop growing at nine years and then fall, so by year 12 the limit is $95,210 and the minimum is $20,769.
3. The limit is a ceiling on what escapes tax, and it is not a payment. An employer that pays only the NES minimum pays only the NES minimum, however high the limit is.

A worked example: six years on $90,000

The following example is hypothetical. It uses the same employee as the table, with six completed years of service.

1. Statutory redundancy pay: 11 weeks at $1,730.77 is $19,038.
2. Notice: 4 weeks (more than 5 years of service, for an employee aged 45 or under) at the full rate. With no loadings in this example, the full rate equals the base rate, so the figure is $6,923.
3. Tax-free limit: $13,598 plus 6 times $6,801 is $54,404.
4. Result: every dollar of the $19,038 sits inside the limit. Adding the notice payment, $25,961 in total, still sits inside it.

Now suppose a negotiated package of $75,000 is agreed for the same employee, and that all of it is counted as a genuine redundancy payment.

1. The amount above the limit is $75,000 less $54,404, which is $20,596.
2. That $20,596 is the ETP part.
3. At the ATO’s stated concessional rate of 32 per cent for a person under preservation age, the tax on that part is about $6,590.

The real figure depends on the person, including their age, their other income and the way the employer classifies each component. Unused leave and super are separate and are not in these sums.

Where the ATO pages and other guides disagree

Three points can change what a reader does next.

1. Payment in lieu of notice. The ATO’s genuine redundancy page lists it among the items a genuine redundancy payment may include. The ATO’s ETP page lists it among ETP payments, and some third-party pages treat it as a separate ETP. The two statements can be reconciled only by classification. The ruling of this guide is that the code on the payslip and the income statement decides which bucket the payment sits in, so the employee should ask payroll in writing how it was classified. The classification matters because the two buckets are taxed differently.
2. Old figures. Anything quoting $13,100 and $6,552 is last year’s limit. Use the ATO table, which carries $13,598 and $6,801 for 2026-27. The ETP cap needs the same care, because the ATO’s page on how ETP components are taxed still prints the 2025-26 cap of $260,000, and the key rates table gives $270,000 for 2026-27.
3. “Payroll must use the ATO tables.” A common line online is that payroll must apply the ATO’s tax tables, so tax withheld is simply correct. That is the rule for the taxable ETP part. The ATO states that the tax-free amount is not part of the ETP and is not assessable. A reader who sees tax taken from an amount that should be within the limit should ask how the payment was classified, in writing, and check that the income statement shows the tax-free lump sum.

What people argue about

Two positions dominate public discussion of redundancy offers. The first is to negotiate. People who take this view argue that consultation can be a formality, that leverage matters, and that a deed of release can add to an offer. The second is to take the money, a view most common where an offer looks generous.

Both positions have a fair point. Negotiation can win real money where consultation or redeployment has gone wrong, though no guide can promise that outcome, and accepting a generous offer is reasonable. The view taken here is narrower: the Act sets the floor, the ATO sets the tax-free ceiling, and everything between the two is negotiated or contractual. A person should know which instrument pays what before any conversation about “more”.

Six questions before you sign

1. Which instrument sets the entitlement: the NES, an award or an enterprise agreement?
2. How many completed years of service has the employer counted?
3. At what base rate for ordinary hours is the redundancy pay priced?
4. How is notice being paid, worked or in lieu, and at what rate?
5. How is each part of the payment coded for tax?
6. Are unused leave and super shown as separate lines?

The final payslip is a payday like any other. The earlier guide to checking a super fund after payday sets out the check that follows wages paid on a last payday. This guide makes no claim about super on termination payments.

Before you sign the letter

Two numbers, two rulebooks, one letter. The Fair Work Act decides the least an employer must pay. The ATO decides how much of the payment is tax-free. The second figure is never a promise of the first. A reader who holds both numbers apart, and who asks in writing how each part is coded, goes into the conversation knowing the floor and the ceiling.

Sources: Redundancy pay, Fair Work Ombudsman (https://www.fairwork.gov.au/ending-employment/redundancy/redundancy-pay); Who doesn’t get redundancy pay, Fair Work Ombudsman (https://www.fairwork.gov.au/ending-employment/redundancy/who-doesnt-get-redundancy-pay); Notice of termination and redundancy pay fact sheet, Fair Work Ombudsman (https://www.fairwork.gov.au/tools-and-resources/fact-sheets/minimum-workplace-entitlements/notice-of-termination-and-redundancy-pay); Genuine redundancy payments, Australian Taxation Office (https://www.ato.gov.au/individuals-and-families/jobs-and-employment-types/working-as-an-employee/leaving-your-job/genuine-redundancy-payments); Employment termination payments, Australian Taxation Office key rates (https://www.ato.gov.au/tax-rates-and-codes/key-superannuation-rates-and-thresholds/employment-termination-payments); How ETP components are taxed, Australian Taxation Office (https://www.ato.gov.au/individuals-and-families/jobs-and-employment-types/working-as-an-employee/leaving-your-job/how-etp-components-are-taxed)