NOT financial advice - seek advice from a professional for your specific situation

    TaxKilnUK tax guidance
    TaxKilnUK tax guidance

    Redundancy + termination → £30k exemption mechanics

    £30,000 Termination Payment Exemption — ITEPA 2003 s.401-416

    ITEPA 2003 s.401-416 is the termination payment regime; s.403 exempts the first £30,000 of qualifying payments from income tax. Qualifying payments include ex-gratia compensation for loss of office, statutory redundancy pay, and (in limited cases) damages for breach of contract or injury-to-feelings awards. Contractual entitlements — salary, bonus, holiday pay, contractual benefits — fall OUTSIDE the s.401 regime and are taxed as ordinary employment income in full. From April 2018, PILON is fully taxable via PENP (s.402D). From April 2020, employer Class 1A NIC applies on the slice above £30,000 (NICs (Termination and Sporting Testimonials) Act 2019). Employee NIC is not charged on s.401 payments.

    Last reviewed:

    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

    In plain English

    When you leave a job, your final pay falls into two buckets. Bucket one — anything you were contractually owed (salary, holiday pay, bonus you'd already earned, contractual notice pay) — is taxed in full as ordinary employment income, with PAYE and NIC. The £30,000 exemption does NOT apply to bucket one. Bucket two — ex-gratia compensation for loss of office and statutory redundancy — falls inside the ITEPA s.401 regime. The first £30,000 of bucket two is tax-free; anything above £30,000 is taxed at your marginal income tax rate but is NOT subject to employee NIC. Since 6 April 2018, all PILON (Pay In Lieu of Notice) is fully taxable, even where the contract doesn't mention PILON. HMRC requires a PENP calculation (covered in our PILON + PENP page) to identify the slice of any termination payment that represents unworked notice — that slice falls into bucket one. Since 6 April 2020, the employer pays Class 1A NIC on the portion of qualifying termination payments above £30,000. This is an employer cost — it does not reduce the employee's net receipt, but employers sometimes try to offset it informally.

    How it works

    What qualifies under s.401

    Ex-gratia compensation for loss of office (severance not contractually owed); statutory redundancy pay under ERA 1996 s.135-181; enhanced (contractual) redundancy ABOVE the statutory minimum that is genuinely ex-gratia rather than contractually due; damages for breach of contract (limited cases — typically only the non-PILON, non-bonus element); injury-to-feelings awards relating to discrimination during employment in limited circumstances.

    What does NOT qualify

    Contractual salary, holiday pay, contractual bonus already earned, contractual benefits-in-kind — all ordinary employment income. PILON / PENP from 6 April 2018 — fully taxable ordinary income. Restrictive covenant payments — fully taxable per Hasted v Horner (1995) 67 TC 439. Payments connected to share schemes or pension entitlements — separate regimes apply.

    Calculating the s.401 slice

    Total termination payment, MINUS contractual amounts (salary, holiday, contractual bonus), MINUS PENP (the unworked-notice slice per s.402D), MINUS restrictive covenant amounts = the s.401 slice. The first £30,000 of that slice is tax-free under s.403; the excess is taxable at the employee's marginal income tax rate.

    Class 1A NIC from April 2020

    NICs (Termination and Sporting Testimonials) Act 2019 imposed Class 1A NIC on the employer on the slice of qualifying termination payments above £30,000 from 6 April 2020. The employee pays no NIC on s.401 payments. Class 1A is reported via the employer's Real Time Information submission and paid to HMRC by the normal Class 1A deadline.

    Aggregation across multiple payments + group employers

    The £30,000 cap is per employment (not per payment). Multiple payments from the same employer (or associated employers) for the same loss of office are aggregated against a single £30,000 cap. Payments from genuinely unrelated employments each have their own cap, but HMRC scrutinises group-company structures designed to multiply the £30k.

    Who this applies to + key conditions

    Statute + manual references

    Primary: Income Tax (Earnings and Pensions) Act 2003 sections 401 to 416 (Part 6 Chapter 3) — the termination payment regime; s.403 grants the £30,000 exemption.

    Related: ITEPA 2003 s.402A-s.402E — PENP and post-April 2018 PILON taxation (inserted by Finance (No. 2) Act 2017); ITEPA 2003 s.406 — injury and disability exemption (no £30k cap); ITEPA 2003 s.413A — legal fees exemption within settlement agreements; ITEPA 2003 s.310 — outplacement / recruitment counselling exemption; NICs (Termination and Sporting Testimonials) Act 2019 — Class 1A on s.401 payments above £30k from 6 April 2020; Finance (No. 2) Act 2017 — PILON reform and abolition of Foreign Service Relief from 6 April 2018

    HMRC manual: EIM12950 onwards (termination payments); EIM13505+ (£30k exemption); EIM13874+ (PENP); EIM13630 (restrictive covenants); EIM13610+ (injury/disability)

    Case law: Hasted v Horner (1995) 67 TC 439 — restrictive covenant characterisation

    Common mistakes + traps

    Worked example

    Marcus, 42, made redundant from £55,000 PAYE role in 2025/26

    Marcus's employer offers: statutory redundancy £12,942, enhanced redundancy ex-gratia £20,000, contractual PILON of 3 months (£13,750), accrued holiday £1,500.

    1. Step 1 — Contractual amounts: £13,750 PILON (taxable via PENP from April 2018) + £1,500 holiday = £15,250 taxed as ordinary employment income (PAYE + employee NIC).
    2. Step 2 — s.401 slice: £12,942 statutory redundancy + £20,000 enhanced ex-gratia = £32,942.
    3. Step 3 — £30,000 exemption applied: £30,000 tax-free; £2,942 taxable at Marcus's marginal income tax rate (40% if his other 2025/26 income pushes him into higher rate after taking the £32,942 into account).
    4. Step 4 — Employee NIC: zero on the s.401 slice.
    5. Step 5 — Employer Class 1A: 13.8% × £2,942 = £406 (employer cost, not deducted from Marcus's net).
    6. Step 6 — Marcus's net from s.401 slice: £30,000 + (£2,942 × 60%) = £31,765 (assuming higher rate on the excess).

    Outcome: Marcus receives £15,250 of contractual income (taxed normally via PAYE) + £31,765 net from the s.401 portion + zero employee NIC on the s.401 portion. Employer pays £406 Class 1A on the excess.

    How this connects to the rest of the framework

    Statutory redundancy calculation →

    Statutory redundancy pay is a s.401 qualifying payment — counts within the £30k cap.

    PILON + PENP formula →

    PENP carves out the unworked-notice slice from s.401 — that slice cannot use the £30k exemption.

    Settlement agreements →

    Settlement agreement structuring determines which slices qualify for s.401 vs which are taxable in full.

    Restrictive covenants →

    Restrictive covenant payments are excluded from s.401 — fully taxable per Hasted v Horner.

    Pension contribution alternative →

    Employer pension contribution is exempt from employment income entirely — outside s.401 framework.

    Injury + disability exemption (s.406) →

    s.406 gives a full exemption (no £30k cap) for genuine injury/disability — separate from s.401.

    /moving-abroad/leaving-uk-procedures →

    Foreign Service Relief abolished from 6 April 2018 (FA 2017) — internationally-mobile leavers can no longer reduce the s.401 charge by reference to overseas service.

    Frequently asked questions

    What happens if I miss the Self Assessment deadline?+
    The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.
    Do I need an accountant or can I file Self Assessment myself?+
    Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.
    How do payments on account work?+
    When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.
    Does the £30,000 exemption include statutory redundancy?+
    Yes — statutory redundancy pay falls within the s.401 regime and counts towards the £30,000 cap. It is not a separate tax-free allowance on top of £30k.
    Is the £30,000 per year or per termination?+
    Per employment / termination event. Multiple payments from the same or associated employers for the same loss of office aggregate against a single £30,000.
    Does the employee pay NIC on a £30k+ termination?+
    No — employee NIC is not charged on s.401 payments. Class 1A NIC (employer-only) applies on the slice above £30,000 from 6 April 2020.
    Can I still claim Foreign Service Relief?+
    Almost never — FSR was abolished from 6 April 2018 by FA 2017. Only narrow transitional cases for terminations straddling the cutover remain.

    Free + regulated-body resources

    Last reviewed: