The tax treatment of termination payments has changed significantly over recent years. The changes have aligned the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees. 

Employees do not pay tax and National Insurance on:

Employees do not usually pay tax on the first combined £30,000 of:

Employees are required to pay tax on any amount over a combined total of £30,000.

An employer is required to pay employer Class 1A NICs on any part of a termination payment that exceeds the £30,000 threshold.

Employees are liable to pay tax and National Insurance on payments they would have earned whilst working. This includes lump sum payments in lieu of notice (PILONs), pay on ‘gardening leave’ and part of any severance, enhanced redundancy or non-cash benefits they receive (known as Post-Employment Notice Pay (PENP).

Source:HM Revenue & Customs| 08-08-2022