What you pay tax and National Insurance on

What you pay tax and National Insurance on depends on what’s 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’ll 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’ll 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 £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’ll pay tax on any amount over a combined total of £30,000. Your employer will pay employer Class 1A National insurance on any amount over a combined total of £30,000. If you do not work your full notice period You’ll pay tax and National Insurance on the part of your termination payment equivalent to what you’d have earned if you were working. This may apply to: lump sum payments in lieu of notice ( PILON ) pay you’re given while on ‘gardening leave’ (where you remain on the payroll but you’re 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 £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 £5,000. The total you’re entitled to is £15,000. You did not need to work your 4-week notice. As you earn £500 per week, this means you would have earned £2,000 in taxable wages. You’ll pay tax and National Insurance on £2,000 of your severance payment. You do not pay tax on the remaining £13,000 of your total payment as it is under £30,000. Example 2 You’re entitled to statutory redundancy pay of £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 £3000. The total you’re entitled to is £13,000. You did not need to work your 4-week notice. As you earn £1,000 per week, this means you would have earned £4,000 in taxable wages, making your PENP £4,000. You’ll pay tax and National Insurance on the full £3,000 of your severance payment. You do not pay tax on the remaining £10,000 of your total payment as it is under £30,000. If you’re 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’re: not resident in the UK for tax purposes (a non-resident) for the whole of the tax year in which your employment terminates someone who works at sea (a ‘seafarer’) a serving member of the armed forces - ask your employer how the payment will be taxed

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 ‘0T’ 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’ll pay over the whole year. If you complete a Self Assessment tax return , include your termination payment as ‘additional information’. 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’ve paid too much tax or you think that your termination payment has not been taxed in the right way, contact HMRC .

Tax on termination payments

What a termination payment is

When you leave a job, you may get a ‘termination payment’ from your employer.

You may get a termination payment if you:

are made redundant
are dismissed
choose to leave your job

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.

View a printable version of the whole guide

Tax on termination payments

What a termination payment is

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Tax on termination payments

What a termination payment is

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