When employment ends in England and Wales (whether through resignation, dismissal or redundancy) the employer must pay everything the employee is owed. Getting the components and the timing right avoids unlawful-deduction claims and disputes. Here is a plain-English guide.
What must be paid on termination
1. Final wages. All salary or wages earned up to the termination date, including any contractual commission or bonus that has accrued.
2. Accrued but untaken holiday. On termination, the employee must be paid for accrued but untaken statutory holiday (Working Time Regulations 1998). Payment for untaken contractual holiday above the statutory minimum depends on the contract or other applicable terms, not automatically on the WTR. Conversely, a contract may allow recovery of holiday taken in excess of entitlement.
3. Notice pay or pay in lieu of notice (PILON). An employee is generally entitled to at least statutory notice (Employment Rights Act 1996) or any longer contractual notice, unless the employer is entitled to dismiss summarily without notice (for example, for gross misconduct amounting to a repudiatory breach). If the employer terminates immediately where notice is due, it will usually pay PILON (if the contract permits) or it may be liable for wrongful dismissal damages.
Tax note: since April 2018, all payments in lieu of notice are taxable as earnings, via the "post-employment notice pay" (PENP) calculation, you cannot treat basic notice pay as tax-free.
4. Statutory redundancy pay (if redundant). Employees with at least two years' continuous service who are made redundant are entitled to statutory redundancy pay, calculated by age, length of service (capped at 20 years) and a weekly pay cap (the cap is updated each April). Enhanced contractual redundancy may also apply.
5. Any contractual termination payments. For example, enhanced redundancy, or a settlement/ex-gratia payment agreed in a settlement agreement.
6. Outstanding expenses and benefits. Legitimate expenses, and the cash value of any benefits where the contract provides.
The £30,000 tax point
Genuine redundancy and certain ex-gratia termination payments (compensation for loss of office that is not earnings) can be paid tax-free up to £30,000; the excess is taxable. But earnings (final wages, accrued holiday, contractual bonuses and PILON/PENP) are always taxable and do not benefit from the £30,000 exemption. Getting this split right matters.
When must payment be made?
- Final pay is usually made on the next normal payday after termination, unless the contract (or an agreement) says otherwise, many employers pay on or shortly after the leaving date. The key rule is to pay what is owed, when the contract/arrangement requires, without unauthorised deductions.
- An employee is entitled to an itemised pay statement, so deductions should be transparent.
- A settlement agreement will specify its own payment dates (e.g. within a set number of days of signing or of the termination date).
- Failure to pay sums due can lead to claims for unlawful deduction from wages or breach of contract.
Practical points for employers
- Calculate each element separately (wages, holiday, notice/PILON, redundancy) and apply the correct tax treatment (earnings vs the £30,000 exemption).
- Check the contract for PILON clauses, bonus rules and any clawback.
- For redundancies, follow a fair process and use the correct statutory calculation.
- Provide a clear breakdown and pay on time.
Key takeaways
- On termination, pay final wages, accrued holiday, notice/PILON, any statutory/contractual redundancy, and agreed termination payments.
- PILON is taxable (via PENP); only genuine compensation for loss of office benefits from the £30,000 tax-free threshold, earnings never do.
- Pay sums due by the contractual/normal payday (or the date in a settlement agreement); late or short payment risks an unlawful-deduction claim.
- Calculate elements separately, apply correct tax treatment, and give an itemised breakdown.
Sources
- Employment Rights Act 1996 (notice periods; statutory redundancy pay; unlawful deductions; itemised pay statements)
- Working Time Regulations 1998 (payment for accrued untaken holiday)
- Income Tax (Earnings and Pensions) Act 2003 (taxation of termination payments; post-employment notice pay (PENP); £30,000 exemption)
--- This article is general information about the law of England & Wales as at 2026, not legal or tax advice. For advice on your circumstances, consult a qualified solicitor or tax adviser.