Termination Payments

February 26, 2020

Changes to the taxation of UK termination payments

In this OnPoint, we report on two changes to the taxation of termination payments to departing employees of which employers need to be aware – first, the levying with effect from 6 April 2020 of employer’s national insurance contributions on termination payments in respect of their excess over £30,000 and, secondly, a change to the calculation of the income tax payable in respect of payments on termination of employment referable to the departing employee’s notice period.

Current tax treatment

The current tax treatment of termination payments can be summarised in broad terms as follows:

  • Payments made to an employee referable to the employee’s notice period are taxable in accordance with the applicable Post Employment Notice Payment provisions and subject to National Insurance Contributions (“NICs”).
  • An additional termination payment compensating an employee for the termination of his or her employment falling within the scope of the applicable exemption can be paid without deduction for income tax and NICs up to a maximum amount of £30,000. Any statutory redundancy payment is tax free and counts towards this £30,000 limit.
  • If the termination payment exceeds £30,000, the excess is subject to income tax but does not attract liability for NICs.

April 2020 changes

With effect from 6 April 2020, the excess of a termination payment over £30,000 will not only be subject to income tax. It will also attract employer’s – but not employee’s – NICs. This will increase the overall cost to employers of severance packages, not least since it is not possible to pass the liability for employers’ NICs to the departing employee.

Post Employment Notice Pay (“PENPs”)

The rules governing PENPs seek in principle to ensure that, even where there is no contractual payment in lieu of notice provision in an employee’s contract, income tax is paid in respect of any payment made to the employee as compensation in respect of any part of the employee’s notice period for which the employee is not employed. In effect all payments in lieu of notice are income taxable and the employer needs to apply the calculation required by the legislation to calculate the income tax and NICs, if any, that are due. However, it has been recognised that the statutory formula for determining a departing employee’s PENP can lead to unintended outcomes where an employee’s payment period is in months but the notice period is days or weeks.

Revised PENP calculation

In its October 2019 Employer Bulletin HMRC confirmed that an alternative calculation of the PENP could be applied where an employee is paid monthly but the part of the notice period that is not being served and for which compensation is paid is not a whole number of months. In its December Bulletin HMRC confirmed that this new alternative calculation applies from 16 October 2019 – it has also issued revised guidance on the calculation of PENPs.

Under the alternative calculation, where:

  • the last pay period of the employee before the “trigger date” relevant to the PENP calculation is a month; and
  • the employee’s salary is paid by 12 equal monthly instalments; and
  • the post-employment notice period is not a whole number of months

the employer can apply the figure of 30.42 – which is 365 divided by 12 – if to do so is favourable to the employee.

Where the last pay period consists of fewer than 31 days, the revised formula may assist the employee in producing a lower taxable PENP than the original formula. Nonetheless employers may wish also to run the calculation on the original formula to verify which approach produces the lower tax liability.

The new calculation

The revised statutory formula is as follows:

PENP = ((BP x D) / P) – T


BP = the employee’s basic pay in the last pay period before (the service of notice or, if no notice is served, the last date of the employee’s employment.

P = 30.42

D = the number of days in the employee’s notice period falling after the end of employment.

T = any taxable payment made such as a contractual payment in lieu of notice.


An employee has an annual salary of £30,000 paid in monthly instalments of £2,500 on the 28th of the month.

The employment is terminated on 1st March and the employee is entitled to 4 weeks’ (28 days’) notice which they do not receive. The pay period preceding the termination date is 1st February to 28th February.

The employee receives a termination payment of £20,000, part of which will be PENP.
Applying the formula, ((BP x D) / P) – T, means:

(£2,500 x 28) / 28 – 0 = £2,500.

If the alternative calculation of PENP is applied, such that 30.42 is substituted as P, the revised calculation is as follows:

(£2,500 x 28) / 30.42 – 0 = £2,301.

Consequently, and to the benefit of the employee, a reduced proportion of the termination payment is taxable as PENP.


The increase to NIC liability in relation to severance payments will need to be factored into employers’ approach to negotiation of exit packages taking effect on or after 6 April 2020. Employers will also need to make sure that their internal processes are updated to ensure that the relevant liabilities are met. They will also need to ensure that they consider and apply the updated PENP provisions where a departing employee does not serve out a whole number of months of their notice period.

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