Process termination pay and PILON

To process an employee's termination pay, refer to the employee's Termination Agreement to see how payments should be processed. This will tell you which elements of pay are taxable.

Note: If a termination payment needs to be made ahead of payroll, you can either make the payment to the employee directly or contact Support. To ensure the employee isn't paid again on pay day, see Ensure an employee isn't automatically paid.

Before you begin

• Termination payments are usually exempt from tax and National Insurance deductions up to the value of £30,000. Any termination payments in excess of £30,000 are given a tax-free allowance of £30,000, and the remaining value is subject to tax and employer's National Insurance. The employee doesn't pay National Insurance on the amount over £30,000.
   

  Portion of Award	Taxable	Employee NI	Employer NI	Notes
  Up to £30,000	No	No	No	Must qualify as a termination payment.
  Over £30,000	Yes	No	Yes (Class 1A)	Deducted through PAYE for tax only; employer pays NI separately.

• UK Payroll reports both taxable and non-taxable portions on the Full Payment Submission (FPS). The taxable element contributes to the employee's taxable pay, but not to National Insurance earnings.
• Employer National Insurance (Class 1A) is reported separately and must be paid by the employer through the P11D(b). To learn more, see Submit your P11D/P11D(b).
• Payment in lieu of notice (PILON) is usually subject to tax and National Insurance.

Note: If you are making a termination payment to an employee after they have left your employment, see Process a Payment After Leaving.

How to process a tax-free termination payment (up to £30,000)

(Optional) Step 1: Record the termination payment in Bob

1. Termination payments recorded in Bob do not sync to UK Payroll. However, you may want to note the payment in Bob for your records.
2. In Bob, navigate to Org > People > relevant employee.
3. In the Payroll section, click the pencil icon.
4. Select Actual Payments. 
5. Click Add row. 
6. Enter the Payment Date, Payment type, and Amount, then click Add. 
7. Click Done. 

Step 2: Enter the termination payment in UK Payroll

1. In UK Payroll, from the left side bar, navigate to Payrolls > relevant draft payroll.
2. Select the relevant employee.
3. Click Add Pay item > + Net addition.
4. Under the Type of addition dropdown, select Termination award (non-taxable).
5. Enter the value (up to £30,000) and click Add net addition.

How to process a termination payment greater than £30,000

1. Process the £30,000 tax-free allowance following the steps above.
2. Once this is complete, click Add Pay item > + Gross addition.
3. Under the Type of addition drop down, select Termination award.
4. Enter the remaining value of the termination payment and click Add gross addition.

How to process a termination payment with Managed Services

To learn more about Managed Services, see Getting started with UK Payroll Managed Services.

1. In the Managed Service template, add the non-taxable termination payment amount (up to £30,000) into the Non-taxable termination award column in the New pay items tab. 
2. If the termination payment is above £30,000, add the remaining value into the Taxable termination award column in the New pay items tab. The Employer Class 1A NICs and employee tax will be automatically calculated in UK Payroll and added onto the employee's payslip. 

How to process PILON

1. From the left side bar, navigate to Payrolls > relevant draft payroll.
2. Select the relevant employee.
3. Click Add Pay item > + Gross addition.
4. Under the Type of addition drop down, select Notice pay.
5. Enter the value of PILON and click Add gross addition.