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    TaxKilnUK tax guidance

    Redundancy + termination → Scenarios — 8 cases

    Redundancy + Termination Scenarios — 8 Worked UK Cases

    Eight worked scenarios showing how the £30k s.401 exemption, PENP, restrictive covenants, employer pension contribution and s.406 interact in real packages. All scenarios use the 2025/26 statutory cap of £719/week (max statutory redundancy £21,570) unless 2026/27 is explicitly cited. Cross-references are made to the moving-abroad cluster for the internationally-mobile case (Foreign Service Relief abolished 6 April 2018) and to the director-shareholder material for senior departures.

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    In plain English

    Each scenario walks the package through: identify contractual amounts; run PENP; identify restrictive covenant slice; identify the s.401 slice and apply £30k; check whether s.406 (injury / disability) or pension restructure improves the outcome. The point is to show that the SAME nominal package can produce very different net outcomes depending on structuring.

    How it works

    Scenario 1 — Long-service junior compulsory (15 yrs, age 38, £35k salary, 2025/26)

    Service breakdown: years to age 38 — 1 year at 41+ band would not apply (still under 41), all 15 years at 22-40 band, 1-week multiplier. Statutory: 15 × 1 × £673 cap if pre-2025/26… use 2025/26 cap £719 = 15 × 1 × £719 = £10,785 statutory. Employer enhanced top-up £12,000 ex-gratia. Total s.401 slice = £22,785 — fully within £30k cap. Tax-free. No PILON. No NIC. Outcome: net £22,785 + holiday pay (taxed normally).

    Scenario 2 — Mid-career voluntary (8 yrs, age 36, £55k salary, 3-month PILON, 2025/26)

    Statutory: 8 × 1 × £719 = £5,752. Enhanced ex-gratia £20,000. PILON 3 months = £13,750 (basic pay £4,583/month × 3). PENP analysis: D = 91 unworked days, BP = £4,583, P = 30, T = £13,750 already labelled — PENP confirms £13,750. Taxable as ordinary income. s.401 slice = £5,752 + £20,000 = £25,752 within £30k cap, tax-free. Total package £39,502; net after tax on PILON ≈ £33,000.

    Scenario 3 — Senior executive with restrictive covenants (£150k, age 47, 12 yrs)

    Statutory: 12 × 1 (years 22-40) + a few years at 41+ … assume 6 years at 22-40 + 6 years at 41+ = 6 + 9 = 15 weeks × £719 cap = £10,785. PILON 6 months = £75,000 (PENP £75k). Restrictive covenants £20,000 (taxed in full — Hasted v Horner). Ex-gratia compensation £30,000 (within s.401 + statutory absorbs £10,785 → remaining £19,215 of cap absorbs the £19,215 of the ex-gratia, rest taxable). Better structure: route the ex-gratia top-up via pension. Reduces immediate tax by £8-12k.

    Scenario 4 — Settlement after grievance threat (5 yrs, age 33, £45k)

    No compulsory redundancy — settlement agreement to end employment with mutual release after grievance. Statutory: not applicable (no redundancy). Holiday pay £3k (ordinary income). PILON 2 months £7,500 (PENP). Ex-gratia compensation for loss of office £25,000 — within s.401 / £30k cap. Legal fees £500 paid direct to solicitor (s.413A exempt). Total £36,000 — £25,000 tax-free + £10,500 taxable + £500 exempt.

    Scenario 5 — Short-service voluntary (2.5 yrs, age 28, £30k)

    Statutory: 2 × 1 × £719 = £1,438 (only complete years count, 0.5 dropped). Enhanced ex-gratia £4,000. PILON 1 month £2,500. Total package £7,938. s.401 slice (£1,438 + £4,000 = £5,438) within £30k cap, tax-free. PILON £2,500 + holiday taxed normally. Simple case — no specialist needed.

    Scenario 6 — Internationally-mobile employee (post-FSR abolition)

    UK-resident employee with 8 years' service, 3 of which were spent on overseas assignment in Singapore (UK-payrolled, dual-resident under treaty). Statutory: 8 × 1 × £719 = £5,752 (UK statutory irrespective of overseas service). Enhanced ex-gratia £40,000. PILON £15,000. FSR pre-April 2018 might have given partial relief for overseas portion of s.401 charge — abolished by FA 2017 from 6 April 2018. Cross-reference: see the moving-abroad cluster on overseas-period UK tax positioning. s.401 slice £45,752 → £30k tax-free + £15,752 taxed at marginal rate. No FSR available.

    Scenario 7 — Senior nearing retirement, pension top-up (age 57, £100k, 22 yrs)

    Statutory cap: 20 years × 1.5 (all in 41+ band) × £719 = £21,570 (the maximum statutory). Enhanced ex-gratia £30,000. PILON £25,000. Total ex-gratia + statutory £51,570 vs £30k cap means £21,570 would be taxable. Restructure: redirect £21,570 into SIPP as employer contribution (within AA + carry-forward). s.401 slice now = £30,000 (£21,570 statutory + £8,430 ex-gratia) → fully tax-free. Pension contribution £21,570 — outside employment income, tax-deferred, 25% PCLS tax-free on drawdown. PILON £25k taxed normally.

    Documented clinical depression diagnosis (Sept 2024); 8 months sickness absence; OH report; consultant psychiatrist confirmation. Settlement Feb 2026. Statutory: 10 × 1 × £719 = £7,190 (assume all years in 22-40 band given termination age 44 with most service prior). Enhanced ex-gratia £20,000 → s.401 within £30k cap, tax-free. s.406 slice £25,000 (in respect of diagnosed condition) — fully exempt, no £30k cap. Holiday £4,000 normal PAYE. Total package £56,190 — £52,190 tax-free under properly-documented mixed s.401 + s.406 split.

    Who this applies to + key conditions

    Statute + manual references

    Primary: ITEPA 2003 s.401-416 (termination regime) + s.402A-E (PENP) + s.406 (injury / disability) + s.308 (employer pension contributions) + s.225 (restrictive undertakings).

    Related: Employment Rights Act 1996 s.135-181 (statutory redundancy); NICs (Termination and Sporting Testimonials) Act 2019 (Class 1A on £30k+); Finance (No. 2) Act 2017 — PENP introduction + FSR abolition

    HMRC manual: EIM12950 onwards (termination payments full chapter)

    Case law: Hasted v Horner (1995) 67 TC 439

    Common mistakes + traps

    Worked example

    Composite example — see the 8 scenarios in 'how it works' above

    Each of the 8 scenarios above is a complete worked example with statutory calculation, PENP analysis (where applicable), s.401 application, and (where relevant) s.406 or pension-restructure outcome.

    1. Use 2025/26 cap £719 for terminations after 6 April 2025
    2. Use 2026/27 cap £751 for terminations after 6 April 2026
    3. Run PENP on any package with un-worked notice
    4. Allocate restrictive covenant consideration explicitly to avoid Hasted v Horner exposure
    5. Use s.406 only with contemporaneous medical evidence
    6. Use employer pension contribution to reduce immediate tax on slices above £30k

    Outcome: Properly structured packages reliably preserve the £30k exemption and can take a six-figure gross package down to a tax bill that's £10-20k lower than a naively-structured equivalent.

    How this connects to the rest of the framework

    £30k exemption mechanics →

    Every scenario applies the £30k cap to the s.401 slice.

    Statutory redundancy calculation →

    All scenarios use the 2025/26 £719 cap mechanics.

    PILON + PENP formula →

    Scenarios with PILON show PENP confirmation.

    Settlement agreements →

    Scenarios 4 and 8 are settlement-driven structures.

    Restrictive covenants →

    Scenario 3 features explicit restrictive covenant slice.

    Pension contribution alternative →

    Scenarios 3 and 7 use employer pension contribution restructure.

    Injury + disability exemption (s.406) →

    Scenario 8 uses s.406 alongside s.401.

    /moving-abroad/leaving-uk-procedures →

    Scenario 6 cross-references the moving-abroad cluster for FSR abolition context.

    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.
    Why do you cite £719 not £673?+
    £719 is the 2025/26 statutory weekly cap (from 6 April 2025); £673 was the 2024/25 figure. Earlier circulating notes incorrectly used £673 in scenarios dated 2025/26.
    What changes for 2026/27?+
    Weekly cap rises to £751 (max statutory redundancy £22,530). Everything else in the framework is unchanged absent further Finance Act reform.
    Why mention FSR if it's abolished?+
    Internationally-mobile leavers commonly assume FSR is still available; the abolition by FA 2017 with effect from 6 April 2018 is one of the most-misunderstood termination tax points.
    Where do I find downloadable templates?+
    Settlement-agreement templates require employment-lawyer drafting given the validity requirements under ERA 1996 s.203(3). We do not publish settlement-agreement templates.

    Free + regulated-body resources

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