This guide is maintained as a current resource for September 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Receiving a redundancy or severance package? Understand how tax and National Insurance apply to your payout. This guide explains exemption thresholds and clarifies what counts as taxable earnings.
When an employment relationship ends in England and Wales - whether through redundancy, dismissal or a negotiated exit - employees often receive payments known as severance or termination payments. These can include statutory redundancy pay, contractual severance, payments in lieu of notice (PILON), or other termination sums. Each element may be treated differently for income tax and National Insurance contributions (NICs). Understanding how these payments are taxed helps employees and employers plan and avoid unexpected tax liabilities. This guide explains the legal rules, practical tax treatment, and common scenarios under UK law.
What Are Severance and Termination Payments?
A termination payment is any sum an employee receives when they leave a job. This can include statutory redundancy pay, enhanced severance, PILON, accrued holiday pay, bonuses, unpaid wages and other benefits provided on termination. Employers must ensure these are taxed correctly under the UK system.
Tax‑Free Threshold: The £30,000 Rule
Under current UK tax law, certain termination payments are exempt from income tax and employee NICs up to a combined total of £30,000. This is often called the £30,000 exemption and applies to genuine redundancy or compensation for loss of employment. It includes:
- Statutory redundancy pay - the legal minimum you must receive if dismissed by reason of redundancy after at least two years' continuous service.
- Additional severance or enhanced redundancy pay - extra compensation agreed by the employer.
- Non‑cash benefits transferred to the employee (such as equipment), valued at their cash‑equivalent.
Anything above this £30,000 threshold is usually treated as taxable income.
Payments That Are Taxable
Not all termination payments qualify for the £30,000 exemption, and some elements are always taxable:
Payment in Lieu of Notice (PILON)
A PILON replaces working your notice period. All PILON amounts are treated as taxable earnings, and both income tax and employee NICs apply. This is because the payment represents earnings you would have received if you had worked your notice. Employers must identify the amount of basic pay the employee would have received if they had worked their notice, and this portion is taxed.
Accrued Holiday Pay, Bonuses and Unpaid Wages
Amounts owed for untaken holiday, unpaid wages, bonuses and similar contractual entitlements are treated as earnings and taxed under PAYE in the usual way. These do not benefit from the £30,000 exemption.
Contractual Payments Related to Work Already Done
Some payments may be made at the point of termination but are essentially deferred earnings, not compensation for loss of employment. As such, they are taxed as normal earnings rather than qualifying termination payments.
Employer National Insurance Contributions
If a termination payment exceeds £30,000 and the excess amount qualifies as taxable income, employer Class 1A NICs are payable on the excess above the threshold. This does not apply to employee NICs on qualifying termination payments but does apply where the payment is treated as earnings (for example PILON or holiday pay).
From April 2018: Post‑Employment Notice Pay (PENP)
Changes introduced in 2018 split termination payments into two parts:
- Post‑Employment Notice Pay (PENP) - the amount you would have earned if you had worked your notice period. PENP is treated as earnings and taxed accordingly.
- Termination awards eligible for the £30,000 exemption - the remaining portion that genuinely compensates for loss of employment.
This change clarified the treatment of payments that might previously have been structured to fall inside the exemption when they should be taxed as earnings.
Examples of Tax Treatment
Example 1: Redundancy and Severance Under £30,000
An employee receives £15,000 statutory redundancy and £10,000 enhanced severance. Combined, the termination payment is £25,000, which falls below the £30,000 exemption. No income tax or employee NICs are due on this amount.
Example 2: Mixed Termination Payment Including PILON
If the same employee receives an additional £5,000 PILON for unworked notice, that element is treated as earnings and taxed under PAYE, even though the overall total would otherwise sit under £30,000.
Example 3: Exceeding the Threshold
An employee gets a total termination payment of £40,000, including redundancy and enhanced severance. The first £30,000 may be tax‑free, but the £10,000 excess is liable to income tax and possibly NICs if treated as earnings or excess termination pay.
Practical Issues for Employers and Employees
Classification and Documentation
Properly classifying each element of a termination package is crucial. Employers and payroll teams must distinguish between redundancy (which may qualify for the exemption) and payments that are earnings (taxable under PAYE). Incorrect classification can lead to incorrect tax withholding.
Timing of Payments and Tax Codes
Termination payments made after leaving employment can be taxed using a temporary 0T tax code under PAYE, which may result in higher initial tax deductions; employees can reconcile this with HMRC later.
Specialist Clearances
HMRC has altered its policy on pre‑clearance for termination payments, meaning employers and advisers may need to use the Non‑Statutory Clearance Service for certainty on treatment. There is no longer a guarantee of a binding HMRC answer outside this process.
Common Questions
Is All Severance Pay Taxed?
No. Genuine compensation for loss of employment, including statutory and enhanced redundancy, can be tax‑free up to £30,000. However, amounts treated as earnings (PILON, holiday pay, bonuses) are taxed in full.
Does the £30,000 Rule Apply to All Jobs?
The £30,000 exemption applies to payments from a single employment. If you have redundancy from different employers or entitlements from related companies, the rules on associated companies may affect how many exemptions apply.
Do I Pay NICs on Redundancy?
Employees generally do not pay employee NICs on qualifying termination payments. Employers pay Class 1A NICs on any excess above the £30,000 exemption and on amounts treated as earnings.
Key Takeaways
The tax treatment of severance and termination payments in England and Wales depends on the nature of each payment:
- Up to £30,000 of genuine compensation for loss of employment can be tax‑free and exempt from employee NICs.
- PILON, holiday pay, bonuses and unpaid wages are generally treated as earnings and subject to income tax and NICs under PAYE.
- Payments above the £30,000 threshold are taxable, and employers pay Class 1A NICs on the excess.
- Classification of termination payments and timing of tax deductions affect how much tax is withheld.
- HMRC's Non‑Statutory Clearance Service can provide certainty on tax treatment where required.
Understanding these rules helps employees and employers manage severance arrangements and tax liabilities effectively.
