Tax on termination payments

Printable version

1. What a termination payment is

When you leave a job, you may get a 鈥榯ermination payment鈥� from your employer.

You may get a termination payment if you:

This could include:

  • statutory redundancy pay
  • holiday pay
  • unpaid wages
  • company benefits, for example bonuses or enhanced redundancy
  • any payments you receive instead of working during your notice period, for example payment in lieu of notice (PILON)

Your employer is responsible for making sure your termination payment is taxed correctly.

2. What you pay tax and National Insurance on

What you pay tax and National Insurance on depends on what鈥檚 included in your termination payment.

Some parts of your termination payment may be considered earnings, meaning they are subject to tax and National Insurance. You鈥檒l pay tax and National Insurance on:

  • unpaid wages
  • holiday pay
  • bonuses
  • payments you get from your employer for agreeing to enter into a restrictive covenant
  • any payments you receive instead of working during your notice period - this may be payment in lieu of notice (PILON) or be part of any severance pay

What you do not pay tax and National Insurance on

You will not pay tax and National Insurance on:

  • contributions your employer makes to a registered pension scheme as part of your termination payment - you鈥檒l pay tax on any employer contributions that go above the Annual Allowance
  • legal costs related to the settlement that your employer pays directly to your solicitor
  • a termination payment you get because of an injury, illness or disability that prevents you from being able to continue to do your job

What may be tax free

You do not usually pay tax on the first combined 拢30,000 of:

  • statutory redundancy pay
  • additional severance or enhanced redundancy payments your employer gives you
  • non-cash benefits, for example company property you keep after your employment ends

You鈥檒l pay tax on any amount over a combined total of 拢30,000.

Your employer will pay employer Class 1A National insurance on any amount over a combined total of 拢30,000.

If you do not work your full notice period

You鈥檒l pay tax and National Insurance on the part of your termination payment equivalent to what you鈥檇 have earned if you were working.

This may apply to:

  • lump sum payments in lieu of notice (PILON)
  • pay you鈥檙e given while on 鈥榞ardening leave鈥� (where you remain on the payroll but you鈥檙e asked not to work)
  • part of any severance, enhanced redundancy or non-cash benefits you get known as Post-Employment Notice Pay (PENP)

If PENP applies to you, your employer will work out how much you have to pay tax and National Insurance on.

If the amount of PENP is more than the total of any severance, enhanced redundancy or non-cash benefits you receive, you will only pay tax on the amount you actually get.

Example 1

You are entitled to statutory redundancy pay of 拢10,000. PENP does not apply to statutory redundancy pay, so you will not pay tax or National Insurance on this.

Your employer adds a severance payment of 拢5,000.

The total you鈥檙e entitled to is 拢15,000.

You did not need to work your 4-week notice. As you earn 拢500 per week, this means you would have earned 拢2,000 in taxable wages.

You鈥檒l pay tax and National Insurance on 拢2,000 of your severance payment.

You do not pay tax on the remaining 拢13,000 of your total payment as it is under 拢30,000.

Example 2

You鈥檙e entitled to statutory redundancy pay of 拢10,000. PENP does not apply to statutory redundancy pay, so you will not pay tax or National Insurance on this.

Your employer adds a severance payment of 拢3000.

The total you鈥檙e entitled to is 拢13,000.

You did not need to work your 4-week notice. As you earn 拢1,000 per week, this means you would have earned 拢4,000 in taxable wages, making your PENP 拢4,000.

You鈥檒l pay tax and National Insurance on the full 拢3,000 of your severance payment.

You do not pay tax on the remaining 拢10,000 of your total payment as it is under 拢30,000.

If you鈥檙e a tax resident in another country, a seafarer or a serving member of the armed forces

You may be able to get part of your termination payment tax free, if you鈥檙e:

3. How tax and National Insurance are deducted

Any tax and National Insurance due on your termination payment will be taken automatically by your employer in your final payslip.

Your employer will put any taxable parts of your termination payment through their payroll and deduct any Income Tax or National Insurance under Pay As You Earn (PAYE).

If you get your termination payment after you have got your P45, your employer will use an 鈥�0T鈥� tax code. Tax will be deducted on the assumption that you have used up your personal allowance for the current tax year.

If your termination payment means your total income for the year is higher than in the previous year, you may pay more tax than usual. You can see an estimate of how much tax you鈥檒l pay over the whole year.

If you complete a Self Assessment tax return, include your termination payment as 鈥榓dditional information鈥�.

If you need support

You can get help if you do not understand something about the way you have been taxed.

If you think that you鈥檝e paid too much tax or you think that your termination payment has not been taxed in the right way, contact HMRC.