Termination Payments Tax 2026/27 — £30,000 Threshold & PILON

When your employment ends, HMRC separates earnings from qualifying termination awards. The first combined £30,000 of qualifying statutory redundancy, severance and compensation is usually free of Income Tax, while notice pay and other earnings remain taxable. Employer Class 1A National Insurance can apply to qualifying awards above £30,000. Work out your own package with the Termination Payments Calculator→.

This guide covers the £30,000 threshold, how Pay in Lieu of Notice and post-employment notice pay are taxed, employer NIC since 2020, statutory redundancy, and three worked examples.

What Is Taxable and What Is Not

The £30,000 exemption is a combined limit for qualifying termination awards connected with the employment, not a fresh allowance for every payment. Statutory redundancy pay and qualifying enhanced or ex-gratia payments share the limit. The detailed treatment can depend on the reason for payment and the employment history, so do not assume that two employers automatically create two full allowances.

PILON and the 2020 NIC Changes

Pay in Lieu of Notice is payment instead of working your notice. PILON and the amount identified as Post-Employment Notice Pay (PENP) are taxable as earnings, whether or not the contract contains a PILON clause. For 2026/27, ordinary Class 1 employee NI is generally 8% between the primary threshold and upper earnings limit and 2% above it; the employer rate is generally 15% above the secondary threshold. Notice pay does not use the £30,000 termination-award exemption.

For 2026/27, employer Class 1A NIC is due at 15% on qualifying termination awards above £30,000. The employee does not pay employee NI on the qualifying termination award or its taxable excess, but notice pay and other earnings use the normal Class 1 treatment.

Statutory Redundancy Pay

If you are made redundant, statutory redundancy pay is based on age, length of service and weekly pay. For redundancies on or after 6 April 2026, weekly pay is capped at £751 and the statutory maximum is £22,530. The formula is half a week’s pay for each full year under 22, one week from 22 to 40, and 1.5 weeks from 41 onwards, with service capped at 20 years. Statutory redundancy pay and qualifying enhanced payments share the £30,000 termination-award limit.

Worked Examples

Example 1 — £50,000 package: Sarah, a higher-rate earner, receives a £12,500 PILON for three months, £20,000 of redundancy and a £17,500 ex-gratia payment. The PILON is taxed at 40% (£5,000); the redundancy uses £20,000 of the exemption and the first £10,000 of the ex-gratia uses the rest, leaving £7,500 taxed at 40% (£3,000). Total tax £8,000, net £42,000.

Example 2 — £100,000 senior package: PILON of £50,000 is taxed at 45% (£22,500); the £50,000 ex-gratia uses the full £30,000 exemption, leaving £20,000 taxed at 45% (£9,000). Total Income Tax in this simplified example is £31,500, net £68,500 before other payroll effects — and the employer Class 1A NIC at 15% on the £20,000 excess would be £3,000.

Example 3 — £25,000 redundancy: Statutory pay of £8,000 plus a £12,000 contractual top-up both sit inside the exemption (£20,000), and a £5,000 PILON is taxed at 20% (£1,000). Net £24,000 — a package built almost entirely from exempt compensation.

Reporting to HMRC

Your employer reports taxable elements such as PILON, holiday pay and wages through payroll and gives you a P45 showing pay and tax. Employer Class 1A NIC on a qualifying termination award above £30,000 is reported and paid by the employer under the termination-award rules. You do not normally file a Self Assessment return solely because you received a termination payment, but other income, a tax shortfall or a repayment claim can change that. Keep the settlement agreement, payslips and P45 with your tax records and follow HMRC’s current record-keeping guidance.

Settlement Agreements and Benefits

Most termination packages are formalised in a settlement agreement: you give up tribunal claims in exchange for the payment. The agreement should clearly separate taxable earnings from qualifying compensation. Employer-paid legal fees can be exempt when the statutory conditions are met and the payment is made in connection with the termination. Benefits that continue after termination can remain taxable benefits in kind. Employer pension contributions are subject to pension rules and allowances; do not describe them as automatically tax-free or always better than cash. Qualifying injury, illness or disability payments can be outside the £30,000 limit, but compensation for other claims needs its own tax analysis.

Benefits Continuing After Termination

If your employer keeps benefits running after your last day, the tax treatment varies by benefit. A company car and private medical insurance can remain taxable benefits in kind until they stop, subject to the reporting rules. Pension contributions may be tax-efficient but are constrained by pension annual-allowance and contribution rules. Some legal, counselling and outplacement support can be exempt when the relevant conditions are met; there is no safe universal monetary shortcut. Check the component-by-component treatment rather than treating every continuing benefit as exempt.

Read the package in payment order

Ask the employer to show the package in the order it will be paid: final salary and bonus, holiday pay, PILON or PENP, statutory redundancy, enhanced redundancy, compensation, legal fees, pension contribution and continuing benefits. This makes it easier to identify which items are ordinary payroll earnings and which use the combined termination-award exemption. A single net figure can hide a tax-code issue or make an exempt compensation payment look like notice pay.

Check whether the agreement describes a payment as compensation without explaining the legal reason for it. The label is not decisive. The employer should identify what the payment is for, the date employment ends, the notice period, the contractual entitlement and any amount that would have been paid if the employee had worked the notice. Keep the calculation of post-employment notice pay with the agreement, especially where salary, benefits or variable pay changed during the notice period.

Tax timing and the final payslip

Termination payments can arrive in different payroll runs. Compare the payment date, tax code, gross amount and tax deducted with the P45 and any later payroll statement. A payment after the P45 may use a different payroll process, while an under- or over-deduction can be corrected through HMRC or Self Assessment depending on the circumstances. Do not calculate the final tax position by applying one percentage to the whole package.

If you start a new job during the same tax year, give the new employer the correct starter information and retain the old P45. The termination payment may affect your total annual income and the tax due even when part of it was paid tax-free. If your income is near a higher-rate band, Personal Allowance taper or a benefit threshold, model the whole tax year rather than only the termination month.

Negotiating cash, pension and benefits

A settlement may offer a choice between immediate cash, an employer pension contribution, continued benefits or a longer notice period. Compare each option after tax and against the relevant limits. A pension contribution can be constrained by annual allowance, carry forward, scheme rules and the employee's ability to access the money. Continuing private medical cover or a company car can remain taxable even when cash pay has stopped. Ask for the tax treatment of each alternative in writing before accepting a revised package.

Also consider non-tax costs: repayment of a training fee, clawback of a signing bonus, share-plan exercise deadlines, restrictive-covenant terms and the loss of insurance cover. These are not automatically part of the £30,000 calculation. Keep the legal and tax questions separate so that an apparently larger tax-free award does not obscure a contractual liability.

Records after leaving

Keep the settlement agreement, payment schedule, redundancy calculation, notice calculation, P45, final payslips, benefit statements, legal-fee invoice and correspondence about any correction. Mark which amounts were included in payroll and which were paid outside the normal run. If the employer later issues an amended statement, retain both versions and record why it changed.

The record should allow you to reconstruct the package without relying on a bank statement description. It should show the gross amount, the exemption applied, taxable earnings, employee NI, tax deducted and any employer-only NIC. This is particularly important when a payment crosses the tax year, when a new job starts quickly or when the settlement includes shares, pension rights or benefits in kind.

Frequently Asked Questions

Model any package with the Termination Payments Calculator→, and read the Redundancy Tax guide if your payment is redundancy-led.

Official sources

• GOV.UK: What you pay tax and National Insurance on when you leave a job
• GOV.UK: Rates and thresholds for employers 2026 to 2027
• GOV.UK: Redundancy pay
• GOV.UK: Explaining your redundancy payments
• HMRC: Class 1A NIC on termination payments