How to enhance tax and NI-free termination payments

New rules will apply to employment termination payments from 6 April 2020, meaning that some settlements will be subject to NI in addition to tax. With this in mind, CHW look at how you can you improve the tax and NI efficiency of a termination settlement.

Termination payment rules recapped

The rules for the taxation of termination payments changed in April 2018. Since then, although the £30,000 tax exemption continues to apply, it cannot cover a payment in lieu of notice (PILON) of any kind. A further change will take effect from 6 April 2020. Whereas currently termination payments are NI free regardless of the amount, from 6 April 2020 they too will only be exempt up to £30,000.

Tax efficiency saves costs

When negotiating a termination settlement with an employee, the more tax and NI efficient the payment is, then the better it is for both sides. Any settlement which is tax free will be worth more to the employee than an equal amount that’s taxable. Therefore, the larger the tax-free element the better.

Not limited by the exemption

If a termination settlement exceeds the £30,000 limit, it doesn’t necessarily mean that it has to be subject to tax and NI.

Some types of payment that would have been tax and NI free, if paid to the employee while they were employed, will escape any liability if paid as part of a termination settlement. For example, you could agree to provide, or continue to provide, a mobile phone for a year or two.

You can also make a tax and NI-free contribution for the former employee into an approved pension scheme. This allows for much greater tax and NI-free amounts and can be especially attractive to older employees as they will be able to access the money from the pension fund when they reach 55.


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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