Golden Handshakes – Tax Implications

Reviewed by Ed WilkinsonLast updated: March 5, 2026 11:24 am

two men in suits shaking hands on the street

In this article:

Understanding Golden Handshakes
Tax Treatment of Golden Handshakes
Strategies for Mitigating Tax Liabilities
A Financial Adviser Can Help

A ‘golden handshake’ is a colloquial term for payments and benefits provided when employment ends, often for senior or long‑serving employees. In UK tax law, these are treated as termination payments, and different elements may be taxed differently. This overview explains the main UK tax rules as at the 2025/26 tax year, highlights planning points, and signposts where regulated advice may help. It is for information only and not personal advice.

Understanding Golden Handshakes

Golden handshakes are typically designed to provide a managed exit and short‑term financial support as someone moves to retirement or a new role. In practice, packages mix different components, each with its own tax treatment. In UK legislation, relevant terms include ‘redundancy payments’, ‘termination awards’ and ‘post‑employment notice pay (PENP)’.

Key Considerations for Golden Handshakes

When structuring a golden handshake, both the employer and the employee should consider the nature and timing of each component to ensure compliance and to avoid unintended tax charges.

Timing of Payments

Timing can affect the overall tax position, but there are limits to what can be changed. Where you are contractually entitled to pay (for example, salary, bonuses, accrued holiday or post‑employment notice pay), it is taxed as earnings when paid and cannot be made tax‑free by deferring it. Genuine termination awards that qualify for the £30,000 exemption are taxed on receipt; paying them in a later tax year may spread income, but the exemption applies once per termination, and anti‑avoidance rules apply to artificial deferral.

Eligibility and Negotiation

Eligibility and terms depend on seniority, years of service and the circumstances of departure. Packages are often negotiated under a settlement agreement, so obtaining independent legal and financial advice is important.

Variability in Lump Sum Payments

Amounts vary widely by employer, role and context. There is no single market standard. For redundancies, statutory redundancy pay uses a set formula based on age and length of service, subject to a statutory weekly pay cap set each April. Contractual or discretionary enhancements may exceed this, particularly for senior roles, but terms are highly specific.

Impact of Stock Options

Share options and awards (for example, unapproved options, EMI options or RSUs) follow plan rules for leavers; some awards lapse, others may vest or be exercisable for a limited period. For most employment‑related securities, any gain at exercise or vesting is taxed as employment income via PAYE (and usually National Insurance). Any subsequent growth after acquisition is then subject to Capital Gains Tax on disposal.

Enhancements to Pensions

Pension enhancements may involve additional employer contributions or the option to contribute more. Employer contributions are generally not treated as taxable income for you, but do count towards your pension Annual Allowance. From 6 April 2024, the Lifetime Allowance¹ was abolished; instead, tax‑free pension lump sums are limited by the Lump Sum Allowance² (currently £268,275 for most people) and related rules. Consider how any top‑ups interact with your Annual Allowance before accepting.

Golden handshakes require careful consideration and planning to ensure they meet personal needs while remaining compliant and tax‑efficient. Employers and employees should take professional advice when tailoring these packages.

Tax Treatment of Golden Handshakes

The tax treatment depends on the nature of each element. Broadly, contractual earnings (salary, bonuses, accrued holiday and post‑employment notice pay) are fully taxable and subject to employee and employer National Insurance. Genuine ex gratia termination awards may benefit from a partial Income Tax exemption. Understanding which rules apply to each component is essential.

Thresholds and Exemptions

For 2025/26, the first £30,000 of a qualifying termination or redundancy payment is free from Income Tax³. Amounts above this are taxed at your marginal rate via PAYE. Employee National Insurance is not payable on the taxable part of a termination award, but employer Class 1A National Insurance⁴ is due on the amount over £30,000. The £30,000 exemption does not extend to post‑employment notice pay, accrued holiday pay, bonuses, or restrictive covenants, which are taxed as earnings.

Adjustments in Tax-Free Allowance

The £30,000 limit is set in legislation and has not been index‑linked for many years. Governments can change it, so check current HMRC guidance before finalising a package.

Specific Tax Considerations

Pension Contributions: Any pension enhancement or employer contribution is not part of the £30,000 exemption. Such contributions are usually tax‑free when paid but are tested against your pension Annual Allowance⁵ (currently £60,000 for 2025/26, subject to tapering for very high incomes, and a £10,000 Money Purchase Annual Allowance⁶ if you have flexibly accessed a defined contribution pension). From April 2024, there is no Lifetime Allowance⁷; instead, limits apply to the amount you can take tax‑free from pensions, notably the Lump Sum Allowance (normally £268,275 unless you hold protections). Exceeding the Annual Allowance can trigger an Income Tax charge, which may be settled via ‘scheme pays’ in some cases.
Stock Options: Taxation depends on the plan. For most unapproved options and RSUs, Income Tax (and usually NICs) arises at exercise or vesting on the difference between market value and the price paid. Capital Gains Tax may apply to any further gain when you sell the shares. The annual CGT exempt amount is £3,000 per individual from 6 April 2024. Rates depend on your income band and the asset type, so timing and any available elections should be considered.
Other Perks: Benefits such as continued use of a company car or private medical insurance are typically treated as benefits‑in‑kind and taxed accordingly through PAYE. The taxable value is added to your other income, and employer Class 1A NICs are usually payable as well.

Additional Considerations for Non-Cash Benefits

Where non‑cash benefits form part of a package, their taxable value is determined under specific HMRC rules. For example, company cars are valued using published benefit‑in‑kind rates, whereas bespoke perks (such as club memberships) may require a specific valuation to determine the amount chargeable to tax.

Clarity on these points helps both parties understand their obligations and plan appropriately. Given the complexity and the potential for significant sums, taking professional advice can be prudent.

Strategies for Mitigating Tax Liabilities

Effective planning can help manage the tax impact of a golden handshake. The right approach depends on your contract, the structure of the package, and your wider financial position.

Deferral of Compensation

In limited cases, it may be possible to agree that certain elements are paid in a later tax year, thereby spreading taxable income. However, amounts treated as earnings (including post‑employment notice pay) are taxed when paid and cannot be converted into tax‑free sums by deferral. The £30,000 termination award exemption applies once per termination, regardless of timing, and HMRC has anti‑avoidance rules for artificial deferral. Always take advice before seeking changes.

Utilisation of Allowances

Make use of available allowances and reliefs where appropriate. For example, the Capital Gains Tax annual exempt amount is £3,000 per person from 6 April 2024; planning the disposal of shares acquired on exercise/vesting can help manage CGT. In some cases, transfers between spouses or civil partners before disposal can rebase ownership for CGT without triggering a gain, though employment‑related securities can have additional restrictions.

Pension Contributions

Additional pension saving can be tax‑efficient. Personal contributions normally receive tax relief up to 100% of your relevant UK earnings (and within your available Annual Allowance). For 2025/26, the Annual Allowance is £60,000, subject to tapering for very high earners; the Money Purchase Annual Allowance is £10,000 if you have flexibly accessed defined contribution benefits. Employer contributions can also be considered, but both employer and personal contributions count towards the Annual Allowance.

Charitable Contributions

Gift Aid increases the value of donations to charity and can reduce your overall tax bill. Charities reclaim basic‑rate tax, and higher‑ or additional‑rate taxpayers can claim extra relief through Self Assessment (Gift Aid effectively extends your basic‑rate band). You must pay at least as much UK Income Tax and/or Capital Gains Tax as the charity will reclaim. Some donations can be carried back to the previous tax year if you file a return on time.

Planning for Non-Cash Benefits

Understand how benefits‑in‑kind are valued and taxed. In some cases, opting for a cash allowance instead of a benefit gives more flexibility, but the allowance is taxed as earnings and may not reduce the overall tax burden. Ask for illustrations before deciding.

By considering these strategies in the round, you can aim to maximise net outcomes while staying within the rules. Regulated advice can help you assess the trade‑offs in light of your goals and risk tolerance.

A Financial Adviser Can Help

Given the complexity of the rules and the potential for substantial sums, many people find it helpful to obtain regulated, independent financial advice when negotiating or receiving a settlement. An adviser can explain how the tax rules apply to your circumstances, help you weigh options (for example, pension funding versus cash), and build a plan for the period after you leave your employer.

Advisers can also support wider planning, including investments, pensions and estate planning, so that any settlement fits your long‑term objectives. This content is guidance only and does not constitute personal advice.

If you choose to seek advice, FinancialAdvisers.co.uk can connect you with an FCA‑authorised financial adviser in your area. We do not endorse any particular firm; always check the Financial Services Register, ask about fees and services, and ensure the advice is suitable for your needs.

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