Termination Awards
Termination awards refer to payments made by an employer to an employee upon the end of an employment contract. These may arise from redundancy, dismissal, retirement, or mutual agreement. While such payments can provide financial cushioning for the departing employee, the tax treatment of termination payments is not always straightforward. Misclassification can result in unexpected tax liabilities, penalties, or reporting issues.
At My Tax Consultants, we help clients — both employers and individuals — handle termination awards accurately in line with HMRC regulations. Our approach is designed to provide clarity on PAYE responsibilities, National Insurance Contributions (NICs), and exemption rules surrounding these payments.
What Qualifies as a Termination Award?
A termination award can consist of several components, depending on the employee’s contract and the circumstances of their departure. Common examples include:
- Redundancy payments (statutory and contractual)
- Compensation for loss of office
- Ex-gratia or non-contractual payments
- Payments in lieu of notice (PILON)
- Unused holiday pay
- Settlement agreements
Each component may be taxed differently. For example, redundancy payments may benefit from tax-free exemptions, while others could fall under PAYE.
Changes to Termination Tax Rules: Why It Matters
Since April 2018, HMRC introduced clearer definitions around post-employment notice pay (PENP) — a concept that has significantly impacted how employers calculate taxable components within termination payments. PENP refers to the amount an employee would have earned if they had worked their full notice period. HMRC considers this part of the payment to be earnings, meaning it’s subject to both Income Tax and NICs.
Further changes in April 2020 required that employers pay Class 1 NICs on any termination payment exceeding £30,000. The £30,000 threshold for tax-free treatment still exists, but it no longer exempts the employer from NIC obligations once crossed.
Understanding how much of a termination award counts as PENP — and ensuring correct calculations — is critical. Errors can lead to underpayments, employee disputes, and HMRC intervention.
Our Role in Managing Termination Awards
My Tax Consultants provides comprehensive support for businesses and individuals who need to deal with termination awards responsibly. Our services include:
- Reviewing employment contracts to determine entitlement
- Calculating PENP using HMRC’s approved formulas
- Classifying termination payments for proper tax treatment
- Identifying exempt and taxable amounts, including for redundancy payments
- Preparing accurate payslips and payroll records
- Advising on compensation for loss of office and potential tax-free benefits
- Handling disclosures in P45s, P60s, and year-end reporting
We’ll also make sure that all relevant documentation supports the reported treatment of these payments, reducing the risk of challenges from HMRC.
Who Needs Termination Awards Guidance?
- Employers who are offering settlement agreements, redundancy, or early retirement
- HR departments preparing termination packages or drafting contracts
- Individuals receiving a lump sum or uncertain about PAYE deductions on their final pay
- Legal advisors and accountants looking for accurate tax input on complex employee exits
Understanding the tax treatment of termination payments is important regardless of the size of your business or the nature of the employment arrangement. From large corporates to small companies, accurate compliance matters.
Why Choose My Tax Consultants
By choosing My Tax Consultants, you gain access to deep knowledge of UK payroll regulations and current tax guidance. We help you avoid penalties, protect employee relationships, and stay confident in your reporting obligations. Every step is handled with attention to accuracy, compliance, and clarity.
Get Help with Termination Awards Today
Don’t risk costly mistakes when dealing with termination awards. Contact My Tax Consultants today to receive professional support on calculating post-employment notice pay, managing redundancy payments, and applying the correct tax treatment of termination payments.
Get in touch now — we’ll help you get it right.
