The client asks
We agreed an additional payment with an employee on termination. Should it be reported on Form 161 or in payroll? If it is a retirement grant, is the whole amount tax-free?
Form 161 and a final payslip are not necessarily alternatives. Establish the payment’s substance first, then its reporting and withholding. Calling a line “retirement grant” does not create an exemption.
1. When can an extra payment be a retirement grant?
A payment arising from the complete end of the employment relationship may form part of retirement grants, including an amount additional to severance accumulated in funds. Review the agreement and what the payment covers. Enhanced severance differs from a performance bonus, unpaid salary or unused-leave redemption. A resignation can also involve a retirement grant, without automatically establishing statutory severance entitlement.
2. Why might the payment also appear on a payslip?
Form 161 records the retirement event, employer and fund amounts, employee elections and instructions to payers. A final payroll statement serves a different purpose and may contain both salary and retirement items. Appearing in payroll does not by itself make a grant ordinary salary; reporting it on Form 161 does not automatically make it exempt. Apply the correct classification and withholding instructions.
3. Does the exemption belong only to the extra employer payment?
No. Separate payers do not each receive a separate exemption merely because money comes from different sources. Consider the relevant grants for the employment period together, the calculated limit and the employee’s elections. Allocation between direct employer payments and fund withdrawals depends on the facts and approvals. A maximum figure in Part A is not, on its own, an instruction to pay that figure tax-free.
4. Which options should be considered?
Depending on eligibility, an employee may withdraw an employer grant while retaining suitable pension-fund amounts under pension continuity; withdraw amounts from one or more sources with exempt and taxable portions; or consider severance continuity. These are not interchangeable choices available for every amount. Pension continuity applies to eligible pension-fund money, not automatically to cash paid by an employer. Severance continuity has conditions, including subsequent employment and the relevant approvals. There is no universal “maximum net” option: withdrawing now can reduce future pension savings, while using exempt grants may affect future pension tax relief.
5. Does two years of employment allow forward tax spreading?
Not automatically. Spreading a taxable grant is a tax-assessor-approved treatment under specific rules, not simply paying in instalments. Forward spreading has service-length conditions and a calculation of eligible years; approximately two years of service does not establish eligibility. Backward spreading is considered over the relevant employment period, up to six tax years and subject to conditions. Review income in the relevant years and reporting obligations before requesting it.
6. What about National Insurance and payment in lieu of notice?
Severance and certain termination payments may be exempt from National Insurance contributions even where an amount is subject to income tax. However, assess each component under National Insurance rules rather than its label. In particular, payment in lieu of notice for the statutory notice period is subject to contributions under National Insurance guidance. Do not apply a blanket retirement-grant exemption or promise savings at a fixed percentage.
7. How does the new Form 161 work?
The employer reports retirement information and amounts in Part A. The employee makes elections in Part B according to the form’s instructions. In Part C the employer issues instructions or refers the matter for tax-assessor instructions, as applicable. Before payment or withdrawal, reconcile the agreement, fund balances, reported amounts and tax approvals. Missing facts should not be replaced with an estimated net payout.
What should you bring for review?
- The completed Form 161 and termination or retirement agreement.
- Relevant payslips and a breakdown of the final settlement.
- Current fund balances and existing tax approvals.
- Details of earlier retirements, new employment and liquidity needs.
Before choosing what to withdraw, review the whole picture.
Let’s discuss the retirement grant ↗General information reviewed on 9 November 2026. Not individual tax or pension advice or an employment-law determination. No private Form 161 has been calculated here. Treatment and withholding depend on the facts and approvals. Send personal documents only through an agreed channel.