Tax Free Allowance

On termination of employment an employee is entitled to a tax free allowance of up to £30,000.00 on any severance or termination payment.

Any payment referable to the contract is taxable.

A payment in lieu of notice is usually treated as falling within the tax free allowance, provided there is not a clause in the contract reserving the right for the employer to make a payment in lieu of notice (a pilon).

If there is such a reserved right, then such a pilon will be treated as taxable by HMRC.