Termination Payment (£30,000 threshold)

A termination payment is any sum paid by reference to the ending of employment that does not flow from the employment contract itself. It includes statutory and contractual redundancy pay, ex-gratia loss-of-office compensation, and damages for breach of contract. It does not include earnings owed up to the leaving date, contractual notice pay (PILON), bonuses earned before the termination date, or settlement of pension rights — those are taxed as ordinary employment income.

The £30,000 threshold under section 403 ITEPA exempts the first £30,000 of qualifying termination payments from income tax altogether. The threshold is per termination, not per tax year, but it is shared across all qualifying payments from the same or associated employers. Any excess is taxed at the employee's marginal rate. Since 6 April 2020, the excess above £30,000 also attracts employer's Class 1A NIC (15% in 2026/27); the employee continues to pay no NIC on any termination payment.

Post-Employment Notice Pay (PENP) is a separate calculation that strips out the value of any unworked notice — that portion is always taxed as earnings, regardless of how the employer characterises it in a settlement agreement.

Worked example: Mehmet is made redundant after 12 years with statutory redundancy of £8,400 and an additional ex-gratia payment of £35,000. His PENP is zero because he worked his full notice. Total qualifying termination pay is £43,400. The first £30,000 is tax-free, the remaining £13,400 is taxed at his marginal 40% rate (£5,360 income tax) plus £2,010 employer's Class 1A NIC. Net to Mehmet from the termination element is £30,000 + (£13,400 − £5,360) = £38,040.