What is Termination Payment £30,000 Exemption?

Full Definition

The £30,000 exemption allows the first £30,000 of a genuine termination payment -- compensation for the loss of a job, rather than payment for work done or notice owed -- to be paid free of income tax, with any amount above £30,000 taxed as general earnings at the employee's normal marginal rate. Qualifying payments typically include ex-gratia lump sums paid on redundancy over and above the statutory or enhanced contractual redundancy entitlement, and compensation paid under a settlement agreement for loss of office where the employee is not contractually entitled to the payment as of right. Amounts that do not qualify include normal pay, bonuses, holiday pay accrued but untaken, and -- since the Post-Employment Notice Pay (PENP) rules were introduced -- any element of the payment that represents notice the employee did not work, which must be identified separately and taxed in full regardless of the £30,000 exemption. While the £30,000 element itself is free of income tax, since April 2020 the employer has been required to pay Class 1A National Insurance (at the employer rate) on any part of a qualifying termination payment above £30,000, even though the employee still pays no employee National Insurance on any part of a genuine termination payment, qualifying or not -- a distinction that means termination payments remain more National-Insurance-efficient for the employee than equivalent regular earnings, even where the amount exceeds £30,000 and becomes taxable. Statutory redundancy pay itself, calculated under the normal statutory formula, always counts toward the £30,000 limit alongside any additional ex-gratia sum, so a generous enhanced redundancy scheme can use up the exemption faster than statutory redundancy pay alone would. Worked example: an employee is made redundant and receives £8,000 statutory redundancy pay plus a £27,000 ex-gratia payment under a settlement agreement, a combined £35,000 qualifying termination payment; the first £30,000 is paid entirely free of income tax, and only the remaining £5,000 is added to the employee's taxable income for the year and taxed at their marginal rate -- with the employer, not the employee, separately liable for Class 1A National Insurance on that £5,000 excess, while the employee pays no National Insurance on any part of the £35,000 at all.

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