Redundancy + Termination Payments — UK Tax Framework

£30,000 exemption mechanics →

ITEPA 2003 s.401-416 (termination payment regime). Section 403 exempts the first £30,000 of qualifying payments. Qualifies: ex-gratia / statutory redundancy / damages for breach (limited) / injury-to-feelings (limited). Does NOT qualify: contractual salary/bonus/holiday pay / PILON post-April 2018 / restrictive covenants / accrued benefits. Class 1A NIC on £30k+ since April 2020 (NICs (Termination and Sporting Testimonials) Act 2019).

Statutory redundancy calculation →

Employment Rights Act 1996 s.135-181. Calculation: ½-week × under-22 years + 1-week × 22-40 years + 1½-weeks × 41+ years. Weekly pay cap 2025/26 £719 / 2026/27 £751. Max years counted: 20. Max statutory redundancy 2025/26 £21,570 / 2026/27 £22,530. 2-year qualifying service required. Tax-free within £30k.

PILON + PENP formula →

Pre-April 2018: contractual PILON taxable; non-contractual could fall within £30k. From April 2018 (FA 2017): ALL PILON treated as fully taxable ordinary income. PENP calculation under ITEPA 2003 s.402D: PENP = (BP × D) / P − T where BP = basic pay; D = unworked days of minimum notice; P = days in last pay period; T = other termination payments characterised as PILON. Per HMRC EIM13880.

Settlement agreements →

Required: written + signed + complaints specified + independent legal advice. Employer typically contributes £350-700 for employee's legal advice. Tax structuring within settlement: holiday + accrued bonus + PILON/PENP = ordinary income; restrictive covenant payments = ordinary income; ex-gratia / compensation for loss of office = potentially £30k-exempt; employer pension contribution = potentially tax-efficient. s.413A ITEPA legal fees exemption + s.310 recruitment counselling exemption.

Restrictive covenants (Hasted v Horner) →

Restrictive covenant payments (non-compete / non-solicit / non-deal) — fully taxable as ordinary income; cannot fall within £30k exemption. HMRC EIM12977+. Hasted v Horner (1995) 67 TC 439 (Vinelott J, ChD) leading authority — see EIM13630. Settlement-agreement drafting traps: poorly-worded clauses can convert £30k-exempt ex-gratia into fully-taxable restrictive covenant payment.

Pension contribution alternative →

Employer pension contribution does NOT count as employment income on the employee. Annual Allowance £60k (2023/24+) + carry-forward of unused AA from prior 3 years. MPAA trap (£10k) if employee has triggered flexible DC drawdown. Tax efficiency: £30k taxable cash at higher rate ≈ £18k net; £30k as employer pension contribution = £30k in pension (tax-deferred + 25% PCLS on drawdown).

Injury + disability exemption (s.406) →

ITEPA 2003 s.406: payments + benefits received in connection with injury or disability are exempt from income tax — no £30k cap; full exemption. HMRC scrutinises payments characterised as injury/disability where employment was simply terminated. Documentation + medical evidence required. Where genuine workplace injury or stress-related disability has occurred, full exemption available beyond £30k.

Scenarios — 8 specific cases →

Long-service junior compulsory redundancy; mid-career voluntary redundancy; senior executive termination with restrictive covenants; settlement after grievance threat; short-service voluntary; internationally-mobile employee redundancy (post-FSR abolition); senior nearing retirement using redundancy for pension top-up; stress-related termination with medical evidence (s.406).