New termination payments guidance released

23 February 2022

Her Majesty’s Revenue and Customs (HMRC) has published some high-level guidance on the topic of termination payments. 

This provides details of:

What a termination payment is

This explains that when someone leaves a job, they could potentially receive a ‘termination payment’ from their employer, if they’re made redundant, dismissed or choose to leave their job. It also lists what a termination payment could be made up of, e.g., statutory redundancy pay and holiday pay.

It also advises that it’s the employer’s responsibility to ensure termination payments are correctly taxed.

What you pay tax and National Insurance (NI) on

This section discusses which elements of termination payments would attract tax and NI. This is anything which would be classed as earnings. There’s also coverage of what wouldn’t be subject to tax and NI, and which sections would only be tax-free.

The guidance offers further information about what happens if an individual does not work their whole notice period. Reference is made to payments in lieu of notice (PILON) and post-employment notice pay (PENP), and some comprehensive examples are provided.

How tax and NI are deducted

This provides information on how tax and NI due on termination payments will be deducted, i.e., through the final payslip.

It also explains about the use of the 0T tax code for any payments made after somebody receives their P45.