Employer National Insurance on termination payments above 30000 - how does it work

The £30,000 threshold works broadly as you describe, and it is confirmed on GOV.UK: no income tax on the first £30,000 combined of statutory redundancy pay, enhanced or contractual redundancy, severance and non-cash benefits. Tax applies to the excess at the employee's marginal rate. And yes — since April 2020, employer Class 1A National Insurance at 15% applies to the excess above £30,000 as well.

Your £40,000 example

If the whole £40k is genuine termination compensation (redundancy plus ex gratia, say), the first £30k is tax-free for the employee, with no employee NICs due on the termination element. The remaining £10k is taxed through PAYE, and you as the employer pay Class 1A at 15% — £1,500 — on that excess.

Reporting and paying the Class 1A

The Class 1A liability on the excess is reported and paid through the payroll on your RTI submissions, so make sure your payroll software's termination payment category is set up correctly before running the final payroll — it should not go through the normal salary route.

The PILON point

This is where it bites. A payment in lieu of notice (PILON) is not termination compensation: since April 2018 it is treated as post-employment notice pay, i.e. earnings. That means full PAYE tax and employee and employer NICs on the whole amount, with no £30,000 exemption. If the £40k in your example included a PILON, you must carve that element out first and tax it as earnings; only the remainder gets the £30k treatment.

The £30k is a combined limit

Statutory redundancy pay counts toward the £30,000 — it is part of the same pot, not in addition to it. Every element of the package is measured against one threshold.

One practical tip: keep the breakdown of the £40k in writing, element by element, with the contract terms each relies on. If HMRC ever asks, the paper trail is what proves each part got the right treatment.