Post-employment notice pay is the part of a qualifying termination package intended broadly to represent basic pay that the employee would have received had the proper notice period been worked. It is taxed as general earnings and does not benefit from the familiar £30,000 termination-payment threshold.
This is why describing a settlement agreement as providing a £30,000 “tax-free termination payment” can be misleading. Salary, accrued holiday pay, bonuses, contractual payments and PENP must first be separated from the genuine termination award before the £30,000 threshold is considered.
How post-employment notice pay is separated from the termination award
The PENP legislation applies to relevant termination awards where an employee leaves without working all of the notice to which they were entitled.
Broadly, the statutory formula examines basic pay, the unworked notice period, the employee’s normal pay period and specified taxable termination amounts already brought into account.
The detailed post-employment notice pay formula calculates PENP using BP, D, P and T. The result is capped so that PENP cannot exceed the total relevant termination awards.
Where an ordinary contractual payment in lieu of notice is already taxable as earnings, the formula prevents the same notice amount being taxed twice.
The objective is to identify the element economically equivalent to normal notice pay and tax that amount in the same manner as ordinary employment earnings.
Post-employment notice pay does not use the £30,000 threshold
Once PENP has been identified, it is taxed as general earnings. The remaining relevant termination award is then considered under the separate termination-payment rules.
The £30,000 termination-payment threshold applies to qualifying amounts within section 403, not to PENP itself.
For example, assume an employee receives a £60,000 non-contractual termination payment and £15,000 of that amount is calculated as PENP. The £15,000 is taxable as earnings. The remaining £45,000 enters the section 403 analysis. Subject to the other rules, the first £30,000 of that amount can fall within the threshold and £15,000 remains taxable.
It would therefore be incorrect to deduct £30,000 from the original £60,000 payment before calculating the notice element.
Several termination payments may have to be aggregated
The £30,000 threshold is not necessarily available separately for every payment made under a settlement.
Payments and benefits connected with the same employment may have to be aggregated, as can qualifying payments connected with different employments with the same or associated employers.
Statutory redundancy and certain qualifying contractual redundancy payments also need to be considered within the wider termination-payment computation rather than treated as giving an additional independent £30,000 exemption.
This becomes important where a settlement provides cash at termination and continuing benefits, later instalments or payments from associated group companies.
National Insurance treatment is not identical to Income Tax treatment
Amounts treated as ordinary earnings or PENP are generally within the normal Class 1 National Insurance rules.
By contrast, qualifying termination payments within the section 403 regime follow their own National Insurance treatment. Employer National Insurance can arise on the taxable excess over the £30,000 threshold even though employee Class 1 National Insurance does not apply to that excess in the same way.
The payroll treatment should therefore distinguish between earnings, PENP and the residual termination award rather than process the settlement as one payment code.
International employees require additional analysis from April 2026
Changes applying from 6 April 2026 revised the interaction between PENP and the rules for internationally mobile employees. The revised provisions address the previous potential for non-UK resident employees to obtain overlapping reductions in relation to duties not performed in the UK.
A termination involving overseas duties should therefore be reviewed under the current rules rather than relying on older settlement calculations.
Employers should incorporate the distinction into their payroll and PAYE procedures before a settlement is paid. Where the package includes notice pay, redundancy, restrictive covenants, pension contributions, shares or internationally mobile duties, specialist tax advice should review each component separately.
Disclaimer: This article is provided for general guidance only and does not constitute personal tax, legal or financial advice. The correct tax treatment depends on the specific facts, applicable legislation and HMRC practice at the relevant time. You should contact us for advice tailored to your circumstances before taking or refraining from any action.
