A comprehensive guide to termination pay in the U.K.

January 27, 2022

It’s an HR inevitability—sometimes employees just don’t work out. 

But terminating employment in the United Kingdom can be a sticky subject. For multinational companies that employ U.K.-based labor, there are a few things you need to know about giving notice and providing appropriate termination pay. 

What is termination pay? 

Employers in the U.K. may be on the hook for providing lump-sum payments to terminated employees, referred to as termination pay.  

Termination pay is what the employer pays out to a terminated employee when they are dismissed from their job. Termination pay in the U.K. may include compensation for a notice period, extras like holiday pay or other contractual perks, as well as any wages owed to the employee for hours worked. 

These payments come in different forms with different requirements. Generally speaking, employers are required to provide between one and 12 weeks of notice of termination—based on an employee’s length of employment.  

Types of termination pay in the U.K. 

The Employment Rights Act of 1996 provides reasonable assurances to employees that their jobs are safe and stable. The legislation spells out protections that prevent employers from terminating employment for certain reasons, as well as provides rules for termination pay when the reason is justified. 

Termination pay typically falls under three broad categories:  

  1. Payment in lieu of notice (PILON) 

  1. Ex-gratia settlements 

  1. Redundancy payments 

Payment in lieu of notice 

Most U.K. employees who have been in their positions for at least one month are entitled to a notice period when their employer chooses to let them go. These notice periods can be lengthy, especially for long-term employees, and it can be a burden for employers to allow terminated employees access to their facilities (awkward, anyone?).  

You can choose to work around the termination notice requirements by using “payment in lieu of notice” arrangements. These arrangements will pay out a lump sum to terminated employees equal to or exceeding the wages that they would be entitled to for the required notice period.  

Time on the Job 

Notice Required for Termination 

Less than One Month 

No Notice Required 

One Month - Two Years 

One Week Notice 

Two Years - 12 Years 

One Week Per Year of Employment 

12 Years+ 

Minimum 12 Weeks' Notice 

For example, an employee who has been on the job for nine months is entitled to one week’s notice. An employer can choose to terminate that employee with a lump sum payment equaling one week of wages with immediate dismissal.  

Ex-gratia settlements 

Employers who want to dismiss an employee quietly and peacefully will often use monetary incentives to gain their cooperation. These ‘good will’ settlements are considered mutually beneficial for the company and the departing employee. 

While not required by law, ex-gratia settlements can be an attractive option for employers looking to part ways in order to avoid a grievance or time-consuming corrective action.  

Let’s say a management-level employee is underperforming but not specifically in gross violation of any company policy. You may be able to persuade this manager to resign using an ex-gratia settlement. You pay out a little money in exchange for avoiding a lengthy—and often more costly—grievance process. 

Redundancy payments 

Redundancy payments provide an entitlement based on the employee’s work history, wages and age that serves as compensation when their position is terminated due to redundancy.  

Here’s what you need to know: 

  • Minimum two years on the job to qualify 

  • Length of service is capped at 20 years

Years of Service by Age 

Pay Entitlement 

Years of Service Under 22 

Half Week of Pay Per Year 

Years of Service Between 22 and 41 

Full Week of Pay Per Year 

Years of Service Over 41 

One and a Half Weeks Pay Per Year 

For example, if an employee is hired at the age of 20 and works for a company for 20 years, they are entitled to: 

  • Two years of service at a half week of pay per year 

  • 18 years of service at one full week of pay per year 

So, 19 weeks of pay total. If the average rate of pay is 500 GBP per week, that is (2 x 250 GBP) + (18 x 500 GBP) = 9,500 GBP. 

Age is undeniably a factor in an individual’s employability. Younger workers tend to receive less redundancy benefits because they are more likely to find alternative employment. Older workers may struggle to find a new position and are therefore compensated at a higher rate to make up for this. 

What is a termination package? 

Many U.K. companies address these termination requirements by offering a termination package that meets the minimum contractual requirements. Sometimes, they’ll even throw in a few feel-good perks to soften the blow. 

Termination packages may include lump-sum payments, as well as any combination of payments and incentives. Depending on what you are trying to accomplish, you may choose to combine incentives like the following in your termination package:  

  • Continuing benefits 

  • Company assets like shares 

  • Tuition assistance for reskilling employees 

Holidays and termination pay 

Most U.K.-based employees are entitled to 5.6 weeks of paid holidays or statutory leave per year. When an employee is let go, employers must pay out any remaining time accrued but not yet taken as of the termination date.  

But there’s a catch—you may require the employee to take this leave while working their notice.  

It would play out like this:  

Your employee has four weeks of holiday leave available and two weeks of required notice. He or she would take two weeks of holiday, and you would pay out the remaining two weeks in a lump-sum termination payment. 

The ongoing pandemic has softened these rules a bit, allowing employees to carry up to four weeks of leave forward.  

How termination pay is taxed in the U.K. 

You can expect that the U.K. government is going to get their fair share of your termination pay package. Understanding how the different types of termination pay are taxed will help you stay in compliance–and current on your tax bill. 

  • PILON payments are taxed as general earnings and should have the appropriate deductions withheld. 

  • Ex-gratia payments include a limit of tax-free payments with amounts over 30,000 GBP subject to tax. 

  • Statutory redundancy payments are tax-free. However, if your termination package includes additional redundancy payments above and beyond the required amounts, those additional payments will be taxed as general earnings. 

The bottom line on termination payments in the U.K. 

When and how you can terminate employees is a little bit of a gray area in the U.K. You can typically cover all of your requirements with payments in lieu of notice, ex-gratia settlements, and redundancy pay.  

But to make sure all of your bases are covered, consider working with a global managed payroll provider that can provide access to the invaluable expertise of in-country HR experts. Outsourcing your payroll can be the best way to stay on top of ever-evolving rules and regulations—so you don’t get sacked yourself. 

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