Termination Payment Tax Calculator United Kingdom

What the termination payment tax calculator does

The calculator takes an exit package, splits it into the parts HMRC treats differently, applies the statutory exemption to the part that qualifies, and adds what is left on top of the pay you have already received in the tax year, so each slice is taxed at the rate it actually reaches.

Settlement letters often quote one headline number and mention the tax-free £30,000 as though it covered everything. It rarely does. Two packages of the same size can leave very different amounts in your bank account depending on how they are made up, and the difference can be thousands of pounds.

The calculator also shows the employer side. Since April 2020 the employer has paid Class 1A National Insurance on the taxable balance of the award, so the true cost of an exit is higher than the gross figure in the letter, which matters if you are costing a redundancy programme.

How termination payment tax is worked out

HMRC sorts a termination package into three parts and taxes each differently.

The first is general earnings: anything you would have been paid for working, such as salary up to the leaving date, accrued holiday pay, unpaid wages and a contractual bonus. It carries Income Tax and employee National Insurance in full, and no exemption applies.

The second is post-employment notice pay. Since April 2018 the notice element of any package is calculated by formula and treated as earnings, whether or not the contract has a payment in lieu clause, which ended the practice of presenting notice pay as compensation. It also carries Income Tax and Class 1 National Insurance in full.

The third is the compensation itself: statutory redundancy pay and any genuine ex-gratia sum paid because the job has ended rather than for work done. This section 401 payment is the only part the exemption covers. The first £30,000 is free of tax and National Insurance; anything above it is taxed as income but carries no employee National Insurance.

The calculator applies that order automatically. Enter the compensation award in the main field and notice pay, holiday pay and any bonus in the advanced fields, and the split follows the statutory sequence.

A worked example

An employee with £32,000 of salary already paid in the tax year receives a £45,000 compensation award. The first £30,000 is tax-free, and the remaining £15,000 sits on top of the salary at a total of £47,000, all within the basic rate band, so the Income Tax on it is £3,000 and no employee NI is due. The employee keeps £42,000 of the award, and the employer pays £2,250 of Class 1A on the £15,000.

Why the marginal rate matters more than the headline

The taxable balance does not start at the bottom of the tax scale; it lands on top of everything you have earned that year. Leave in month eleven with most of a salary behind you and even a modest taxable balance can run into the higher rate band. Leave in April with little pay behind you and the same package may be largely covered by the personal allowance and the basic rate band. The leaving date is a real planning lever, so check both scenarios before agreeing one.

Above £100,000 the personal allowance is withdrawn at £1 for every £2 of income, so income in that range is effectively taxed at 60%. A large redundancy award can easily push an otherwise ordinary income into it. The calculator shows how much of the allowance survives.

The pension route and the exemption

An employer contribution paid directly from the award into a registered pension scheme is fully exempt. It sits outside the calculation, so the £30,000 exemption remains available for the cash element.

A leaver who diverts part of a large award into a pension can keep the cash within the exemption, avoid the higher rate on the balance and keep the personal allowance. Use the pension field to find the split that works before the settlement agreement is signed, because the structure is fixed after signature.

The annual allowance still applies, and taking pension benefits flexibly in the past may have reduced it, so check it before committing a large sum.

What the calculator does not cover

It assumes a single employment ending in the tax year, works out National Insurance on an annual basis rather than per pay period as payroll does, and uses rest-of-UK rates rather than the Scottish bands. It does not handle foreign service relief, injury or disability payments that are exempt in their own right, or share awards vesting on exit.

It cannot tell you whether an offer is fair; it tells you what the offer is worth after tax, which you need to know before you can judge.

The exemption, band thresholds, tax rates, National Insurance limits and employer Class 1A rate all come from the maintained parameter set, so the results follow any rule changes.

The result is a planning estimate, not a tax computation or legal advice. Check any settlement with a solicitor and confirm the payroll treatment with the employer before you sign.

About This Tool: Termination Payment Tax

Termination payment tax: use this tool to get an instant, accurate estimate. The figures follow official HMRC guidance and every rate and threshold is kept up to date for 2026. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.