Termination payment letter

When making a payment to an employee or former employee relating to the termination of their employment you should provide details of the payment and any tax and NI deducted. They will need this information for their tax records.

Termination payment

Special tax and NI rules apply to payments made to an employee in connection with the termination of their employment. The rules determine how much if any of the payment is liable to tax and NI and how much of the tax is collected through PAYE. Each element of the payment must be considered in accordance with the special rules. Broadly, the rules are:

• all payments in lieu of notice (PILONs) are earnings subject to PAYE tax and Class 1 NI
• payments for arrears of holiday pay, bonuses and other earnings an employee is entitled to are taxable and liable to NI
• a £30,000 tax and NI exemption applies to the total of statutory, contractual redundancy payments and certain other payments
• compensation for loss of employment and similar payments may be liable to tax as deemed PILONs, otherwise the £30,000 tax and NI exempt also applies

Use our Termination Payment Letter to provide the employee with details of the termination payment and any tax and NI paid.