Alan McCormack | Senior Associate

Treatment of Termination Payments

Termination payments are made, usually under a settlement agreement, by an employer to a departing employee. The tax position on termination payments depends on various factors such as the background circumstances to the termination of the employment and how the termination payments are paid. The Government confirmed at its Autumn Statement in November 2016 that it would both simplify and tighten-up the tax rules for termination payments with effect from the start of the 2018/19 tax year.

Proposed Changes

The legislation splits an employee’s termination payment into two types of payment: payments that can still benefit from the £30,000 threshold and those that cannot. The legislation works by first identifying any payments that should be treated as earnings and any remainder is then subject to the £30,000 exemption.

All payments in lieu of notice, whether contractual or not, will be subject to tax and national insurance. The £30,000 exemption will not apply to any payments in lieu of notice.

The significant changes are scheduled to be brought in April 2018. Amongst these changes the most significant is that all notice pay regardless of its nature, is to be treated as earnings therefore will be subject to both taxation and National Insurance contribution.


The tax treatment of such settlements is critical and is often the difference between a case being settled or not.  The nature of the payment, the intentions of the employer and the reasons behind each payment require to be reviewed to help establish the correct tax treatment of termination payments.

Contact Jackson Boyd For Advice on Your Settlement Agreement

If you’ve received a settlement agreement, you may be wondering how much tax you will have to pay on the payments you’re being offered. In order to ensure that whether an employer or an employee you have correctly calculated this and to make sure you receive the correct legal advice please contact us online by clicking here or speak to a member of our specialist team on 0333 222 1855.

Alan McCormack

Alan McCormack

Employment Law Team

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