New announcement. Learn more


News and advice to help make your property business a success

Landlords TaxProperty TaxLandlords Tax ReturnsLandlords AccountsProperty Tax ReturnProperty AccountsLandlords FinancialTax ReturnsTaxLandlords AccountantChartered AccountantsOnline AccountantOnline BookkeepingOnline Tax ReturnsYour Online AccountantYour Online BookkeeperBusinessadviceAccountingVATCashflowProperty AccountantSmallbusinessBusinesstipsCapital Gains TaxDividendsExpensesIhtexemptionsInheritance TaxPropertySDLTTaxplanningCgtFurnished Holiday LettingsHMRCIncome TaxInvestment Property TaxNICPAYEPensionProperty bookkeeperTaxreturnAllowable Business ExpensesAnnual Exempt AmountBusiness ExpensesBusiness RateCapital AllowancesCapital GainsCapital gains tax propertyCashbasisComplianceDeductibleexpensesDisincorporationEmployment AllowanceFHLsFinanceFinancialmanagementGiftsHMRC complaintsHoliday Lets TaxLettingsMaking Tax DigitalMakingTaxDigitalMileage AllowanceMobilephonesNational InsuranceOverlapreliefPartnershipPartnershipbusinessesPprProperty Company TaxProperty Tax Deductible ExpensesPropertyallowanceReimbursedexpensesRent a Room ReliefResidence ReliefSmall BusinessTax free incomeTax ReliefTimetoPayVAT invoice60 day capital gains limitAbolitionclass2AccrualsbasisAcquisitionsAdvisoryfuelratesAIAirBnBAlphabet sharesAmapAnnual Tax on Enveloped DwellingsAppealArtificial intelligenceAssessmentAsset disposalAssociated CompanyAssociated Company Tax RulesAutumnstatementBad DebtBad Debt Tax ReliefBaddebtsBadgesoftradeBeancounterBenefits in KindBreakeven PointBudgetBusiness adviceBusiness asset defermentBusiness coachBusiness ContinuityBusiness EntertainmentBusiness RatesBusiness Rates ReliefBusiness tipsBusinessgrowthBusinesstypesBuy or Lease EquipmentBuytoletCapital Allowances for CarsCapital GainCapitalallowancesCapitalexpenditureCar Capital AllowancesCarry Back LossesChange of Tax BasisChatGPTChild BenefitCIS SchemeCommon TenantCompanies ExpenditureCompanies HouseCompany Account DeadlinesCompany Account FilingCompany Strike OffCompany Tax Efficient PropertyCompanyassociationCompanyloanstaxfreeCompulsory Strike OffConstruction Industry SchemeContacthmrcContentmarketingContributionsCorporation Tax LossesCorporation Tax New RegimeCorporation Tax RatesCorporationTaxCostsCryptocurrencyCustomerlistimplicationsDeductible Business ExpensesDeductionsDemergerDepreciationDevelopmentDirectorsDirectors LoansDirectorsloansDisallowable Business ExpensesDiscoveryDividend allowanceDividend Allowance ReductionDividend PlanningDividendallowanceDLADomestic Items Tax ReliefDormantcompanyEISEmployee DiscountEmployee managementEmployeecompensationpaymentsEmployeeOwnershipTrustEndoflifeplanningEnquiryEnterpriseResourcePlanningEntertainmentEntrepreneurmindsetEquityExpenses Allowed For TaxExtrabenefitEyetestsFlippingFurnished Holiday Lets TaxGift AidGift AllowanceGrowthhacksHelp to pay tax billsHICBCHMO Licensing FeesHoldoverreliefHoliday Lettings TaxHow to apply for a Business LoanHow to Extract ProfitHumourHybridIllegaldividendsIncomeInflationary GainsInfluencersInheritance Tax Nil Rate BandInterest RatesInterestreliefInterestrestrictionISAJoint TenantKeypersoninsuranceLandlord RepairsLandlords Self AssessmentLate vat registrationLBTTLeadgenerationLeadmagnetLeanbusinessmodelLetting Agent DisbursementsLetting Agent RecharresLettings ReliefLimitedcompanyLiquidation DemergerLoaninterestLong Lets TaxLongserviceLTTMainresidencereliefManaged LetsManagement accountingMaritalhomedivorceMarriage allowanceMarriageallowanceMileage paymentMinimumwageMixedusesdltMortgage costsMortgage Interest ReliefNew propertyNewcompanycarfuelratesNewnicrulesNIC 2023 to 2024NIC savingsNicdisregardNicreductionNMWNmwerrorsNon Allowable Business ExpensesNon-taxableNudgeletterOptiontotaxvatOverpayment ReliefPaperformParttimePatternofoccupancyPAYE by Direct DebitPayrollingPenaltypointsPension Payments Tax ReliefPensioncontributionsPensionsPerformance-reviewsPeriodofgracePeriodsofabsencePersonal ExpensesPersonal financePersonalallowancePersonalguaranteesPostcessationreliefPretradingexpensesProfitProfit-and-lossProfitAndLossProperty AllowanceProperty Development CompanyProperty IncorporationProperty Investment CompanyProperty investor accountsProperty investor tax tipsProperty LettingProperty Rental BusinessProperty TradingPropertycompanyRecharges by Estate AgentsRegularpaymentsReliefRent your driveRentalRentaroomResearch & DevolopmentResidential property gainsResidentialsdltRetail stock controlRetainedprofitsRevenueRoom for rent taxRtiSASalarySavingsSDLT changesSection 455 TaxSection455taxSelective Licences LandlordsSelf AssessmentSelf-employednicSelfemployedSelling OnlineSeperationServicechargesSettlementslegislationSimplified ExpensesSmallbizSmallbusinessratereliefSoftwareSole TraderSpring BudgetStaffpartiesStamp dutySuccessJourneyTax Allowance on DrivewaysTax AllowancesTax BreakTax CodesTax DeadlinesTax DeductionsTax Filing DeadlinesTax Free ChildcareTax on Company VansTax positionTax tips for landlordsTaxbillpaymentsTaxconsequencesTaxincentivesTaxpositionTaxpositionassetsTaxreliefTaxreliefsTaxsesTerminationpaymentsTipsTrade professionalTrainingTransfer AssetsTransfer Assets Between SpousesUmbrellacompanyUndisclosedincomeUnpaid RentVAT Bad Debt ReliefVAT DeadlinesVAT DisbursementsVAT PenaltiesVAT registrationVAT Reverse ChargeVatpenaltiesVatregisteredVatregistrationthresholdWellbeingWorking from home

Tax implications of termination payments

Tax implications of termination payments

The number of businesses closing down is steadily increasing. Many of those businesses will have staff, therefore the legal and tax position of any termination payment must be considered.

Many assume that any amount up to £30,000 is tax free. However, this may not apply to all redundancy payments not least because termination payments will often comprise several elements. For example, any employee with more than two years’ service will be entitled to statutory redundancy payments (not taxable) and where the notice period is not required to be worked in full, payment in lieu of notice (PILON) may be due (taxable). The employee may feel they are entitled to damages, be it due to a breach of their contract or perceived discrimination against them (conditions apply).

When calculating whether any or part of the payment is tax free, the first consideration needs to be whether any of the payment is contractual (e.g., a contractual bonus) – if so then that amount will be taxed under PAYE as usual. If any restrictive covenants are in place (i.e., payments made for agreeing to restrict that individual's future conduct or activities usually for a specific period or area of work), any payment is also taxed under PAYE. If the payment is in lieu of notice that too is subject to PAYE. Any remaining parts of the termination payment potentially fall under the £30,000 exemption.

Payments in lieu of notice (PILON)

On the termination of employment, an employee is usually entitled to notice. Where this is worked, any income earned for the period will be subject to PAYE as usual. However, where the notice period is not worked, any element of the termination payment relating to a PILON is subject to PAYE as general earnings – any balance remaining comes within the £30,000 exemption.


To calculate the taxable amount, the amount of 'post-employment notice pay' (PENP) needs to be calculated and compared with the 'relevant termination award' (RTA). The PENP is the pay the employee would have received had they worked their notice period (excluding any salary sacrifice arrangements). The RTA is the total termination payment excluding statutory redundancy payments.

The formula used to calculate the PENP is ((BP x D)/P) – T where:

·         BP is the employee’s basic pay for the last pay period ending before the 'trigger date', i.e., the day of notice or the last day of employment, if no notice was given;

·         D is the number of calendar days between the employment ending and the end of the notice period;

·         P is the number of calendar days in the employee’s last pay period; and

·         T is the amount paid taxable as general earnings (not including any accrued holiday pay).

If the PENP is higher than the total RTA, then the PENP is 'capped' at the total amount of the RTA, the balance being  treated as employment income, tax, and NI due under PAYE. If the PENP is lower, the amount is taxed as employment income subject to tax and NI with any remainder falling within the £30,000 exemption.

Tax on any resulting chargeable amount is treated as the top slice of earnings above any dividend or savings income.

The PENP calculation is required whether or not the employee or former employee receives a contractual or non-contractual payment. Some employers do not include the right to a PILON in their employment contracts, paying damages for breach of contract instead. Damages qualify as a relevant termination award, are tax free up to £30,000 and are completely NI free.