Termination Payments: Understanding the Tax Implications

Tax Implication

Are you someone fearing a termination from your job? Let’s admit that facing a job termination can be a daunting experience. In such a scenario, the last thing you want to worry about is the complex world of taxes. When you leave your job, you may receive a termination payment from your boss if your position is no longer needed, you are fired, or you choose to leave your job. So, here is all that you need to know about termination payments and their tax implications. 

What could be included in a termination payment?

Your termination payment may include your statutory redundancy pay, any holiday pay, your outstanding wages (if any), some company benefits like bonuses or any payment in lieu of notice (PILON), ex-gratia payments, etc. 

How termination pay is taxed in the UK? 

It is important to know that different types of termination payments are taxed differently by the UK government. While all PILON payments are taxed, there is a limit of £30,000 tax-free payment for ex-gratia payments and statutory redundancy payments. Interestingly, some of the PILON payments were earlier considered tax-free, but this luxury is no longer applicable.

To have a better understanding of how your termination payment is taxed in the United Kingdom, suppose you have received an ex-gratia payment of £50,000 from your employer. In such a case, you will be taxed only on £20,000 i.e. the amount beyond the threshold limit of tax exemption. However, statutory redundancy payments are entirely tax-free. In short, you are tax-free on your termination payments up to a combined total of £30,000. 

Remember things may be different if you are not a UK resident for tax purposes or you are someone who was working at sea or a serving member of the armed forces. In all these three scenarios, a sizeable part of your termination payment will be tax-free.

How tax and National Insurance are deducted?

In all probabilities, if there is any tax or national insurance due on your termination payment, it will be deducted automatically under pay-as-you-earn (PAYE) by your employer and will be reflected in your final payslip. However, if you have received your termination payment after receiving your P45 form from your employer, there is a tax deduction. It is made based on this assumption that you have utilized your personal allowance fully for a tax year. Your P45 form will reflect the amount of tax you have paid on your salary so far in that tax year.

If you’re still confused or unsure whether you’ve been taxed correctly, it’s recommended that you must consult a qualified professional or skilled UK accountant. Remember, termination isn’t just about signing off; there’s much more to navigate. If you’re planning to leave your job, hire someone who can guide you through the process with their expertise and experience.