Redundancy pay has three moving parts, and getting any one wrong creates either an underpayment claim or an unexpected tax bill. There is the severance amount set by the National Employment Standards redundancy scale, based on years of service; there is notice (or pay in lieu), which is separate from severance; and there is the tax treatment, where a genuine redundancy is tax-free up to a limit ($13,100 plus $6,552 per completed year of service for 2025-26, per ATO ETP thresholds) and the rest is taxed as an employment termination payment. This guide explains how to calculate each part with a full worked example, how the parts interact, and the traps that turn a routine redundancy into an expensive mistake. Figures are general information current as at July 2026; confirm the live indexed tax amounts for your payment date.
Published: July 2026
Work through the steps in order. Do not collapse severance, notice and leave into one gross figure and apply a single tax rate. For the full exit stack including leave, see how to calculate final pay in Australia and termination of employment. Context on volumes sits in Australian redundancy and retrenchment. People process support: human resources services. Cost of the role being removed: run the numbers in the employee cost calculator.
The National Employment Standards set the minimum redundancy (severance) pay for eligible employees, based on continuous years of service, paid at the employee’s base rate for ordinary hours. The scale rises with service, then steps back down at the top:
The drop at 10 years surprises people; it exists because employees with 10-plus years were historically covered by long service leave, and it is a genuine feature of the scale, not an error. Several exclusions apply: employees with less than 12 months’ service, most casuals, and, importantly, small business employers (fewer than 15 employees, counted on a headcount basis including certain associated entities) are generally not required to pay NES redundancy pay at all, though an applicable award, enterprise agreement or contract may still require it. Always check the instrument, because the award can be more generous than the NES and the contract can be more generous again.
Notice of termination is a distinct entitlement from redundancy pay, and the two are added together, not substituted. An employee being made redundant is entitled to notice (or payment in lieu) under the NES scale based on age and service, from 1 week up to 5 weeks, on top of their severance pay. A common and expensive error is treating the redundancy scale as covering notice; it does not. The full exit cost is severance plus notice (or pay in lieu) plus any accrued but untaken leave, and each is calculated and taxed differently.
The genuine redundancy tax-free amount. If the redundancy is “genuine” under the tax law (the position is abolished, not a disguise for performance or misconduct dismissal, and the employee is under age-pension age), a portion of the redundancy payment is completely tax-free: for 2025-26, $13,100 plus $6,552 for each completed year of service (indexed every 1 July; confirm the current year’s figures). Only completed full years count. An employee with a qualifying genuine redundancy after ten completed years has a tax-free amount of $13,100 + (10 × $6,552) = $78,620.
The excess as an ETP. Any redundancy amount above the tax-free limit is taxed as an employment termination payment, concessionally up to the ETP cap ($260,000 for 2025-26) and at the top marginal rate above it. The tax-free component does not count against the cap.
What is not tax-free. Unused annual leave and long service leave paid on termination are taxed separately (generally at concessional but not tax-free rates), and are not part of the genuine redundancy tax-free amount. Bundling them in is a frequent payroll error.
Non-genuine redundancy. If the redundancy does not meet the genuine test, most commonly because the role is quietly filled again, or the real reason was performance, the entire payment loses the tax-free component and is taxed as an ordinary ETP from the first dollar, which the ATO actively reviews.
Hypothetical permanent employee, not a small-business employer situation.
Step 1: NES severance weeks. At 7 to 8 years: 13 weeks.
Severance dollars: 13 × $1,800 = $23,400.
Step 2: Notice. NES notice for this service and age is commonly 4 weeks (confirm exact NES table for age and service).
Pay in lieu: 4 × $1,800 = $7,200.
Notice is not part of the genuine redundancy tax-free amount in the same way severance is analysed; treat streams separately for tax and STP reporting. Do not collapse into one “redundancy” label in payroll.
Step 3: Genuine redundancy tax-free limit (2025-26 rates).
$13,100 + (7 × $6,552) = $13,100 + $45,864 = $58,964.
Severance of $23,400 sits entirely under the tax-free limit, so the full $23,400 severance is tax-free if the genuine test is met. (If severance had been larger than $58,964, only the excess would be ETP-taxed.)
Step 4: Leave. Annual leave payout is calculated and taxed under leave rules, not added into the $58,964 tax-free redundancy bucket.
Step 5: Employer cash out the door (pre-tax components stacked).
Severance $23,400 + notice $7,200 + leave (4 × $1,800 = $7,200) = $37,800 before considering super on eligible components and any other contractual amounts. Super treatment on termination components must be checked against current ATO rules for each stream.
Interpretation. The employee should see a payslip (or payment summary breakdown) that separates tax-free genuine redundancy, taxable ETP if any, notice, and leave. A single gross with one withholding rate is the classic error.
Redundancy is high-stakes because it combines an employment-law calculation (the NES scale and notice, where underpayment is a Fair Work matter) with a tax calculation (the genuine redundancy treatment and ETP, where errors create withholding problems and unexpected bills). The safe approach is to calculate each stream separately and correctly: confirm the award or agreement (which may exceed the NES), apply the NES scale and notice, identify accrued leave, test whether the redundancy is genuine, and apply the tax-free limit and ETP treatment accordingly, ideally before the termination is finalised. An embedded finance and payroll function runs this as a checklist, coordinating employment-law entitlement with tax treatment so the employee is paid right and the withholding is right.
How much redundancy pay is an employee entitled to?
Under the NES, from 4 weeks at 1 to 2 years of service up to 16 weeks at 9 to 10 years, dropping to 12 weeks at 10-plus years, paid at base rate. Small business employers (under 15 staff) are generally exempt from NES redundancy pay, and awards, agreements or contracts may require more, so always check the instrument.
Why does redundancy pay drop after 10 years?
Because employees with 10-plus years were historically covered by long service leave, the NES scale steps back to 12 weeks at 10 years from 16 weeks at 9 to 10 years. It is a real feature of the scale, not a mistake.
Is notice included in redundancy pay?
No. Notice (or pay in lieu) is a separate NES entitlement of 1 to 5 weeks based on age and service, added on top of redundancy pay. Treating the redundancy scale as covering notice is a common and costly error.
How much of a redundancy payment is tax-free?
For a genuine redundancy in 2025-26, $13,100 plus $6,552 for each completed year of service, indexed every 1 July. An employee with 10 completed years has $78,620 tax-free. Any excess is taxed as an employment termination payment, concessionally up to the $260,000 ETP cap for 2025-26.
Is unused leave part of the tax-free redundancy amount?
No. Unused annual leave and long service leave are taxed separately (concessionally, but not tax-free) and are not part of the genuine redundancy tax-free component. Bundling them in is a frequent payroll error.
What makes a redundancy non-genuine for tax?
If the position is quietly refilled, the real reason was performance or misconduct, or the employee is at or above age-pension age. A non-genuine redundancy loses the tax-free component entirely and is taxed as an ordinary ETP from the first dollar.
Do small businesses have to pay redundancy?
Generally not under the NES if they employ fewer than 15 people (headcount basis), but an applicable award, enterprise agreement or employment contract may still require redundancy pay, so the instrument must be checked rather than assuming the exemption applies.
When should the redundancy be calculated?
Before the termination is finalised. The tax position, especially the genuine redundancy test and the correct separation of severance, notice and leave, is far easier to get right in advance than to fix after payment.
Does superannuation apply to redundancy pay?
It depends on the component and current ATO rules for ordinary time earnings and termination payments. Do not assume every termination dollar attracts super; check each stream.
What if our award is more generous than the NES?
Pay the higher of the NES and the instrument. The tax-free genuine redundancy limit is a tax concept and does not reduce the employment-law entitlement.
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We review and check this guide periodically. At the time of writing (July 2026), all information was current. Scale Suite is a registered BAS Agent, not a licensed tax advisor or financial advisor. This content is general information only and does not constitute professional tax, financial, or legal advice. Some details may change over time.
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
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