NI on Termination Payments

Key facts

First £30,000 of a genuine termination payment is exempt from Income Tax and employer NI.
Amounts above £30,000 are subject to Class 1A employer NI at 15% (from April 2025) — but not employee NI.
Pay in lieu of notice (PILON) is always subject to Income Tax and full Class 1 NI (both employee and employer).
Statutory redundancy pay counts towards the £30,000 exemption.
Post-Employment Notice Pay (PENP) rules ensure untaken notice periods are taxed as earnings.

NI Rules for Termination Payments

When employment ends, the departing employee may receive various payments: statutory redundancy, enhanced severance, pay in lieu of notice, compensation for loss of office, and garden leave pay. The NI treatment depends on the type of payment and whether it exceeds the £30,000 exemption.^[2]

The rules can be summarised as:

Contractual payments (salary, holiday pay, bonuses, PILON) — subject to full Class 1 NI (employee and employer)
Termination payments up to £30,000 — exempt from Income Tax and NI
Termination payments above £30,000 — subject to Class 1A employer NI only (not employee NI)

The £30,000 Exemption

The first £30,000 of a qualifying termination payment is exempt from both Income Tax and National Insurance. This exemption covers:^[2]

Statutory redundancy pay
Enhanced redundancy pay (above the statutory minimum)
Compensation for loss of office
Ex-gratia payments on termination
Non-contractual severance payments

Important: The £30,000 exemption is a lifetime allowance per termination of employment — not per payment. If you receive multiple payments relating to the same termination, they are aggregated against the single £30,000 limit.

Amounts Above £30,000

Any termination payment above £30,000 is treated differently for Income Tax and NI:^[2]

Component	Income Tax	Employee NI	Employer NI
First £30,000 of termination payment	Exempt	Exempt	Exempt
Amount above £30,000	Taxable (at marginal rate)	Exempt	Class 1A at 15%

This is an important distinction: the amount above £30,000 attracts Class 1A employer NI (not Class 1). This means:

The employee pays no NI on any part of a qualifying termination payment
The employer pays 15% Class 1A NI only on the excess above £30,000

Worked example — employee receives £50,000 termination payment:

First £30,000: exempt from IT and NI = £0 tax or NI
Remaining £20,000: subject to Income Tax at employee’s marginal rate
Employee NI on £20,000: £0 (employee NI does not apply)
Employer Class 1A NI: 15% × £20,000 = £3,000

Pay in Lieu of Notice (PILON)

PILON is a payment made to the employee instead of requiring them to work their contractual notice period. The NI treatment of PILON depends on whether there is a PILON clause in the employment contract:^[3]

Contractual PILON

If the employment contract contains a PILON clause (giving the employer the right to make a payment instead of notice), the PILON is treated as earnings and is subject to:

Income Tax through PAYE
Class 1 employee NI
Class 1 employer NI

Contractual PILON does not form part of the £30,000 exemption.

Non-Contractual PILON

Even if there is no PILON clause in the contract, the Post-Employment Notice Pay (PENP) rules (from April 2018) ensure that an amount equivalent to the notice period pay is treated as taxable earnings. See the PENP section below.

Post-Employment Notice Pay (PENP)

PENP was introduced to prevent employers from structuring termination payments to avoid tax on what is effectively notice pay. The PENP calculation applies when an employee leaves before the end of their notice period:^[4]

The PENP formula is:

PENP = ((BP × D) ÷ P) − T

BP = basic pay in the last pay period before the trigger date
D = number of days in the unworked notice period
P = number of days in the last pay period
T = any contractual PILON or notice pay already taxed as earnings

The resulting PENP amount is treated as taxable earnings subject to Income Tax and full Class 1 NI (both employee and employer). It is separated from the remaining termination payment, which can then benefit from the £30,000 exemption.

Complete Worked Example

Consider an employee who is made redundant with the following package:

Payment Component	Amount	Income Tax	Employee NI	Employer NI
Final salary & holiday pay	£3,000	PAYE	Class 1 (8%/2%)	Class 1 (15%)
Contractual PILON (3 months’ notice)	£10,000	PAYE	Class 1 (8%/2%)	Class 1 (15%)
Statutory redundancy pay	£8,500	Exempt (within £30k)	Exempt	Exempt
Enhanced severance	£35,000	First £21,500 exempt; £13,500 taxable	Exempt	Class 1A on £13,500

In this example:

Final salary and PILON are contractual payments — fully subject to Class 1 NI
Statutory redundancy (£8,500) uses £8,500 of the £30,000 exemption
Enhanced severance: £21,500 is covered by the remaining exemption; £13,500 exceeds it
Employer Class 1A NI on excess: 15% × £13,500 = £2,025
Employee pays no NI on either the statutory redundancy or the enhanced severance

Statutory Redundancy Pay

Statutory redundancy pay is calculated based on the employee’s age, length of service, and weekly pay (capped at £751 per week for 2026/27):^[1]

0.5 week’s pay for each full year of service when aged under 22
1 week’s pay for each full year of service when aged 22 to 40
1.5 weeks’ pay for each full year of service when aged 41 or over
Maximum 20 years’ service can be counted

The maximum statutory redundancy pay is £22,530 (30 weeks at £751). This amount counts towards the £30,000 exemption.

Tip: When structuring a termination package, consider the NI implications. Since the employee pays no NI on qualifying termination payments (even above £30,000), while the employer only pays Class 1A on the excess, termination payments can be more NI-efficient than equivalent bonus payments — which would attract full Class 1 NI from both parties.

Frequently Asked Questions

Is my redundancy payment subject to NI?

The first £30,000 of a genuine redundancy or termination payment is exempt from both Income Tax and National Insurance. If your total termination payment exceeds £30,000, only the employer pays NI (Class 1A at 15%) on the excess. You as the employee do not pay NI on any part of a qualifying termination payment.

Does statutory redundancy pay count towards the £30,000?

Yes. Statutory redundancy pay is included in the £30,000 tax-free exemption. For example, if you receive £12,000 in statutory redundancy and £25,000 in additional severance, the combined £37,000 means £30,000 is exempt and £7,000 is taxable.

What is PILON and how is it taxed?

Pay In Lieu Of Notice (PILON) is a payment made instead of requiring the employee to work their notice period. If your contract includes a PILON clause, the payment is treated as earnings and is subject to Income Tax and Class 1 NI (both employee and employer). It does not benefit from the £30,000 exemption.

What is Post-Employment Notice Pay (PENP)?

PENP is a calculation that ensures the value of any unworked notice period is treated as taxable earnings, even if there is no PILON clause in the contract. It was introduced in April 2018 to prevent employers from disguising notice pay as tax-free termination payments. PENP is subject to Income Tax and full Class 1 NI.

Sources

Redundancy: your rights — GOV.UK
Tax on termination payments — GOV.UK
Employment Income Manual: Termination payments — HMRC
Post-employment notice pay — HMRC