Work out post-employment notice pay before applying the £30,000 termination threshold
Calculate post-employment notice pay (PENP) first, then test what remains against the £30,000 threshold. In a hypothetical £39,400 package, £2,800 is taxed as earnings, £30,000 is exempt and £6,600 is a taxable termination award that also carries employer Class 1A National Insurance contributions (NIC).
Sort the agreement before using the threshold
A redundancy label on a settlement does not remove the need to examine each component. Wages, contractual payment in lieu of notice (PILON) and PENP are earnings subject to PAYE and Class 1 NIC as applicable. Eligible statutory redundancy, enhanced severance left after PENP and relevant non-cash benefits usually share one £30,000 exemption. It is not a deduction against final pay and is not applied payment by payment.
Class 1A on the excess qualifying termination award is paid by the employer. It is not employee NIC.
Sources and context, checked :
The PENP formula
PENP is ((BP × D) ÷ P) − T, with a floor of zero and a cap at total relevant termination awards. BP is statutory basic pay, D is unworked calendar days under the notice rules and P is pay-period days in the weekly case. T covers eligible termination payments or benefits already taxable under another provision. In this example, it is the already taxable PILON. Holiday pay and termination bonuses are expressly excluded.
Section 402D has special rules for certain monthly payrolls, so do not apply the weekly example to them.
Sources and context, checked :
Hypothetical settlement
Assume weekly basic pay of £700, a 7-day last pay period and 28 unworked calendar days. A separate £1,400 already taxable PILON qualifies as T. The package also holds £32,000 cash enhanced severance, a relevant termination award, and £6,000 statutory redundancy, with no other payments, exemptions or prior awards using the threshold.
Income-taxable amounts total £9,400. The PILON remains taxable as earnings. Subtracting it in T prevents the same notice pay from being counted again as PENP. The statutory redundancy stays outside the PENP cap. HMRC's worked example follows the same order, putting PILON in T, splitting out PENP and applying section 403 to the balance.
| Step | Calculation | Result |
|---|---|---|
| PENP | (£700 × 28 ÷ 7) − £1,400 | £1,400, within the £32,000 cap |
| Taxed as earnings | £1,400 PILON + £1,400 PENP | £2,800 |
| Eligible for threshold | £32,000 − £1,400 + £6,000 | £36,600 |
| Exempt | First £30,000 | £30,000 |
| Taxable excess with employer Class 1A | £36,600 − £30,000 | £6,600 |
| Package check | £2,800 + £30,000 + £6,600 | £39,400 |
Sources and context, checked :
Sign-off file
Keep contract and statutory notice details, the last completed pay period and basic pay, the trigger date and employment end date, each component and the support for T. Reconcile the agreement total to the PAYE and Class 1 bucket and the termination award and Class 1A bucket.
Before approving the next settlement, ask HR for any earlier connected awards or non-cash benefits and check them against the threshold first.
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