The Case

Exit payments: £95,000 cap on public sector exit payments to be implemented following outcome of Government consultation process.

Following the conclusion of its consultation process on the topic of caps on exit payments to employees in the public sector, the Government has confirmed its intention to apply a £95,000 cap on the total value of such payments.

To whom this applies

It is proposed that the cap will apply to current and future public sector employees as well as office holders.

There will be some bodies that are to be exempt including public financial corporations, the BBC and the Armed Forces. The Government's expectation is that such bodies will still introduce their own caps on exit payments.

What payments are included

The £95,000 cap, which would apply before deduction of tax, will include any exit payments to those leaving employment. The following payments are to be within the scope of the cap:

  • Redundancy payments, whether related to voluntary or compulsory redundancies;
  • Payments made on voluntary exit;
  • The cost to the employer of offering early access to an unreduced pension;
  • Any severance or ex-gratia payments relating to termination of employment;
  • The value of any additional leave or other benefits offered as part of the termination process excluding payments related to employment (such as accrued but untaken annual leave);
  • Payments in lieu of notice
  • Payments of outstanding entitlements or for other benefits or allowances that are "cashed up."

It is irrelevant if the payment is made in accordance with an existing scheme or as a one off arrangement with the particular exiting individual.

Payments from the above list will also be aggregated together and measured against the cap.

What arrangements may be caught in the scope of the cap

As can be seen above the cap is aimed at catching both contractual and non-contractual payments on termination of employment. It is clear from the outcome to the consultation that the following arrangements will be caught:

  • Compulsory redundancies
  • Voluntary redundancy schemes or other voluntary exits where "compensation packages" are offered
  • Any ex gratia or severance arrangements
  • Employer costs of providing early unreduced access to pensions
  • Payments in lieu of notice or payments relating to outstanding elements of fixed term contracts.

Payments that are specifically to be exempted from the cap will include:

  • Compensation for death or injury attributable to employment
  • Ill health retirement
  • Compensation paid for breach of contract or unfair dismissal following litigation between the parties.

Can the cap be waived

It is the Government's intention that there will be a process for consent to be obtained for waving the cap in certain exceptional individual cases. This will include a requirement for Treasury and Minister approval.

For Local Authorities, Full Council will be able to decide whether to waive the cap within their delegated powers.

In all cases public bodies will be required to maintain records and publish details of all exit payments made in each financial year.

What this means for employers

While further legislation on this issue is necessary to implement the change, it is clear that it is the Government's intention to introduce a cap to exit payments. Employers in the public sector will need to start to review their policies and terms and conditions of employment in order to be ready to deal with the impact of this change on arrangements for the termination of employees. The effect is likely to make is less attractive for employees, to whom the cap may apply, to consider voluntary redundancy or agreed terminations of employment.

Public sector exit payments: response to the consultation