Processing termination payments in UK Payroll

When processing a qualifying termination payment in UK Payroll, it's important to use the correct pay element to ensure the payment is processed in line with HMRC requirements.

Before you begin

Qualifying termination payments of up to £30,000 can be processed using either the Termination Award (Non-taxable) system pay element or an equivalent custom net addition pay element in UK Payroll (or synced from HiBob), as these payments are not subject to Income Tax or National Insurance.

For any qualifying termination payment above £30,000, you must use the pre-configured gross pay element Termination Award in UK payroll. This pay element applies the correct HMRC treatment by calculating Income Tax and Employer Class 1A National Insurance, while not applying Employee National Insurance. This tax treatment cannot be replicated using custom pay elements created in UK Payroll or synced from HiBob.

Process a non-taxable termination payment

For the non-taxable portion of a qualifying termination payment (generally up to the first £30,000):

1. Navigate to UK Payroll > Employees.
2. Open the employee's payslip.
3. Select Add pay item > Net addition > Termination Award (Non-taxable).
4. Alternatively, use an equivalent net pay item, added directly into UK Payroll or synced from HiBob.
5. Enter the non-taxable amount.
6. Save

Process a taxable termination payment

For the taxable portion of a qualifying termination payment (generally any amount above £30,000):

1. Navigate to UK Payroll > Employees.
2. Open the employee's payslip.
3. Select Add pay item > Gross addition > Termination Award.
4. Enter the taxable amount.
5. Save

Example

An employee is due a qualifying termination payment of £50,000:

• Pay element Amount
• Termination Award (Non-taxable) £30,000
• Termination Award £20,000

This ensures the first £30,000 is processed as non-taxable & not subject to national insurance deductions, with the remaining £20,000 subject to taxes & Class 1A NIC.

Key points

• Qualifying termination payments up to £30,000 can be processed using the Termination Award (Non-taxable) system pay element or an equivalent custom net addition pay element.
• Always use the Termination Award system pay element for the taxable portion of qualifying termination payments above £30,000.
• Do not use a custom gross pay element for taxable termination payments, as it cannot apply the required Employer Class 1A National Insurance treatment.