Severance Package Tax Calculator UK
Calculate the exact take-home pay from your employment termination package. Model statutory redundancy pay, discretionary ex-gratia compensation, the £30,000 tax-free exemption (s.401 ITEPA 2003), Post-Employment Notice Pay (PENP), and 0% employee National Insurance.
Employment Termination Package Calculator
Model statutory redundancy pay, discretionary ex-gratia compensation, Post-Employment Notice Pay (PENP / PILON), accrued holiday pay, and employer Class 1A NICs.
1. Employment History & Regular Salary
Capped at £700/week for statutory redundancy calculations.
2. Severance Package Breakdown (The 4 Settlement Elements)
Distinguish genuine termination compensation from contractual notice & holiday payCalculated backwards based on your age: 0.5 wk (<22), 1.0 wk (22-40), 1.5 wks (41+). Counts towards the £30,000 exemption.
Enhanced redundancy, discretionary golden handshakes, or settlement agreement compensation for loss of office. Exempt up to £30k; amounts over £30k pay Income Tax but zero employee NI.
Under Section 402D ITEPA, Post-Employment Notice Pay (PENP) is carved out from the £30,000 exemption. Subject to standard PAYE Income Tax and Class 1 National Insurance.
Untaken statutory and contractual annual leave paid out upon termination under Working Time Regulations 1998 Reg 14. Subject to PAYE and employee NI.
3. Tax Year Context & Marginal Rate Positioning
Taxable severance sits on top of your existing salary earned in the same tax yearScotland applies devolved Scottish Income Tax rates (19% to 48%). NI is uniform UK-wide.
Determines whether taxable severance triggers the 40% Higher Rate band or the £100k 60% Taper Trap.
Clean take-home pay in your pocket after PAYE Income Tax & Class 1 NI deductions.
Your full termination award is 100% tax-free under UK statutory law.
Itemised Settlement Breakdown & Tax Calculation
| Settlement Component | Statutory Basis | Gross Amount | Tax-Free (£) | PAYE Tax (£) | Employee NI | Net In-Pocket |
|---|---|---|---|---|---|---|
| Statutory Redundancy Pay | ERA 1996 s.162 / ITEPA s.401 | £6,300.00 | £6,300.00 | £0.00 | £0.00 (0%) | £6,300.00 |
| Ex-Gratia Severance Compensation | ITEPA 2003 s.401 | £20,000.00 | £20,000.00 | £0.00 | £0.00 (0% Exempt) | £20,000.00 |
| Notice Pay (PILON / PENP) | ITEPA 2003 s.402D (General Earnings) | £4,333.00 | £0.00 | -£866.60 | -£346.64 | £3,119.76 |
| Accrued Holiday & Contractual Arrears | WTR 1998 Reg 14 / ITEPA s.62 | £1,500.00 | £0.00 | -£300.00 | -£120.00 | £1,080.00 |
| Total Package / Payout | All 4 Statutory Elements | £32,133.00 | £26,300.00 | -£1,166.60 | -£466.64 | £30,499.76 |
Statutory Settlement Agreement & Redundancy Rules to Verify
Employers cannot avoid tax on notice pay by disguising it as ex-gratia compensation. HMRC strictly applies the PENP statutory formula to carve out notice pay before applying the £30,000 exemption.
Unlike standard salary, termination payments under Section 401 are legally exempt from employee Class 1 NI even on amounts above £30,000. You pay Income Tax on the excess, but save 2% to 8% in NI!
If your employer contributes towards your legal fees for independent legal advice on a settlement agreement, this payment is 100% tax-free in addition to the £30,000 exemption (must be paid directly to your solicitor).
Employers often tax redundancy payments made after P45 issuance under emergency code 0T on a non-cumulative basis. You may temporarily overpay tax, which HMRC automatically refunds via P800 or in-year claim.
How UK Severance Packages Are Taxed (ITEPA 2003 s.401)
When an employment relationship ends through redundancy, voluntary severance, mutual separation, or a settlement agreement, the departing employee frequently receives a composite termination package. In the United Kingdom, HM Revenue & Customs (HMRC) does not treat a termination package as a single monolithic payment. Instead, UK tax law dissects the settlement into distinct statutory categories, each with its own tax and National Insurance treatment.
The cornerstone of UK termination tax law is Section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Under Section 401, genuine payments made directly or indirectly in consideration or in consequence of the termination of an employee's employment qualify for a £30,000 statutory tax exemption.
What Qualifies for the £30,000 Tax-Free Exemption?
- Statutory Redundancy Pay (SRP): Mandatory statutory payouts calculated under Section 162 of the Employment Rights Act 1996 (ERA 1996) based on service years, age multipliers, and statutory weekly caps (£700/week for 2026/27).
- Enhanced / Ex-Gratia Severance Pay: Discretionary termination compensation paid by an employer above statutory minimums, including voluntary redundancy incentives, golden handshakes, and settlement agreement compensation for loss of office.
- Damages for Wrongful Dismissal: Genuine breach-of-contract compensation for loss of office where notice was not provided under common law (subject to the PENP statutory rules).
The 0% Employee National Insurance Advantage
One of the most valuable aspects of UK employment termination law is the complete exemption from employee Class 1 Primary National Insurance contributions (NICs).
Under the Social Security Contributions and Benefits Act 1992 (SSCBA 1992), payments that fall within Section 401 ITEPA 2003 do not constitute "earnings" from employment for employee National Insurance purposes. Crucially, this 0% employee NI exemption applies even to amounts exceeding the £30,000 threshold.
If you receive a £50,000 severance award, the first £30,000 is 100% tax-free and NI-free. The remaining £20,000 is subject to Income Tax at your marginal rate (e.g. 40% = £8,000 tax). However, because 0% employee NI is deducted (unlike normal wages where 2% to 8% NI is levied), you retain £42,000 of the £50,000 package—an effective tax rate of just 16.0%.
Employer Class 1A NIC Liability (15.0% on Excess over £30k)
While departing employees enjoy 0% employee NI on severance awards of any size, employers face a statutory liability. Under legislation introduced in April 2020 and updated for 2026/27 under the National Insurance Contributions (Secondary Class 1 Contributions) Act 2025, employers must pay Class 1A National Insurance at 15.0% on termination awards that exceed £30,000.
This charge is reported and paid by the employer through Real Time Information (RTI) payroll submissions at the time the termination payment is made. It does not reduce the employee's take-home pay, but increases the employer's total cost of departure.
Post-Employment Notice Pay (PENP) & Notice Rules (ITEPA s.402D)
Historically, employers could draft contracts without a contractual Pay In Lieu of Notice (PILON) clause, allowing notice compensation to be structured as non-statutory breach-of-contract damages under the £30,000 tax-free exemption.
Parliament eliminated this planning strategy through the Post-Employment Notice Pay (PENP) legislation enacted under Sections 402B to 402E ITEPA 2003. Under the statutory PENP framework, any payment received in lieu of unworked notice is legally classified as general earnings under Section 62 ITEPA 2003.
The Statutory PENP Formula (Section 402D ITEPA 2003)
PENP = ((BP × D) / P) − T
The calculated PENP amount is carved out of the severance package and taxed in full as earnings—subject to PAYE Income Tax, employee Class 1 NI (8%/2%), and employer Class 1 Secondary NI (15.0%). Only the remaining severance balance qualifies for the £30,000 exemption.
Accrued Holiday Pay & Contractual Arrears (WTR 1998 Reg 14)
Under Regulation 14 of the Working Time Regulations 1998 (WTR 1998), employees whose employment terminates with untaken statutory annual leave are legally entitled to a payment in lieu of accrued leave.
Holiday pay is earned emolument arising directly from employment services rendered under Section 62 ITEPA 2003. Consequently:
- Holiday pay does not qualify for the £30,000 exemption under Section 401.
- It is subject to PAYE Income Tax at your prevailing marginal rate.
- It is subject to employee Class 1 Primary National Insurance (8% up to £50,270 and 2% above).
- Your employer must pay 15.0% Employer Class 1 Secondary National Insurance on holiday pay.
Tax Strategy: Pension Salary Sacrifice on Excess Severance
When a severance award exceeds the £30,000 statutory limit, the excess is pushed into the employee's marginal tax bands. For employees earning over £50,270, this triggers 40% Higher Rate Income Tax. For those whose total income falls between £100,000 and £125,140, the taxable severance triggers the punitive 60% Personal Allowance taper trap.
Under Section 193 of the Finance Act 2004, departing employees and employers can execute a pre-termination pension salary sacrifice agreement:
Benefits of Severance Pension Sacrifice
- 100% Income Tax Shield: The sacrificed severance is paid directly into your registered workplace pension or SIPP as an employer contribution, completely eliminating 20%, 40%, or 45% PAYE Income Tax.
- Employer Saves 15.0% Class 1A NI: Because employer contributions into registered pension schemes are exempt from Class 1A NICs, the employer saves 15% on the sacrificed excess. Many employers agree to share this saving by adding a contribution bonus into the employee's pension.
- Preserves Personal Allowance: For high earners, sacrificing excess severance prevents taxable income exceeding £100,000, preserving your £12,570 tax-free Personal Allowance.
Settlement Agreements & Legal Fee Exemption (ITEPA s.413A)
In mutual separation or negotiated departures under Section 111A of the Employment Rights Act 1996, the employee signs a binding Settlement Agreement waiving statutory employment claims in exchange for financial consideration.
For a settlement agreement to be legally valid under Section 203 ERA 1996, the employee must receive independent legal advice from a qualified solicitor or trade union representative. To facilitate this, employers standardly contribute between £350 and £1,500 + VAT towards legal costs.
Under Section 413A of ITEPA 2003, employer contributions towards independent legal advice are 100% tax-free. Crucially, this legal exemption is separate from the £30,000 termination allowance and does not reduce your £30,000 tax-free severance pot, provided the payment is made directly by the employer to your legal counsel.
Frequently Asked Questions
Statutory answers regarding redundancy packages, tax codes, notice pay, and HMRC rules.
Frequently Asked Questions
Clear answers based on official HMRC rules and statutory guidance.
Recommended Resources
Related Calculators, Salaries & Guides
Explore connected UK tax tools, popular salary benchmarks, and statutory HMRC guidance.
Related Calculators
All CalculatorsStatutory Redundancy Pay Calculator
Model continuous service years, age multipliers, and statutory weekly caps under ERA 1996.
Take-Home Pay Calculator UK
Calculate your net monthly salary when securing a new employment role following termination.
Workplace Pension Deduction Calculator
Assess the tax efficiency of directing severance amounts above £30,000 into a registered pension.
HMRC Tax Refund & Rebate Calculator
Check if your final termination payslip was overtaxed under emergency code 0T and claim your rebate.
Compare Common UK Salaries
All Salary BracketsStatutory Tax Guides & Blog
Visit Blog HubRedundancy Pay Tax UK (2026/27)
Comprehensive statutory guide to the £30,000 exemption, PENP formulas, and Class 1A NICs.
P45, P60 & P11D Forms Explained
Ensure your employer provides correct departure tax documentation to prevent emergency taxation.
The £100k Tax Trap UK (2026/27)
How taxable severance can push total earnings over £100,000 and trigger the 60% marginal tax rate.
Separate the payment types
Statutory redundancy pay depends on age, complete years of service, weekly-pay limits and the termination date. Pay in lieu of notice and holiday pay are different payment types.
The £30,000 exemption is not a blanket exemption for all money paid on leaving a job. Contractual entitlement, PENP and employer NI can require specialist review.
Check the rules for your circumstances
Official guidance supports the rules described here; it does not approve or certify this calculator. Confirm dates, eligibility and unsupported cases before making a financial decision.