It is easy to make the mistake of assuming that the first 30,000 of any termination payment will automatically benefit from the £30,000 "golden handshake" exemption from tax. But the exemption is notoriously complex; in particular, it applies only to those elements of the termination package that are not "otherwise chargeable to income tax".

In Hayward v Revenue & Customs the employer had a discretion under the claimant's service agreement to make a payment in lieu of his six months' notice period. When his employment ended, a compromise agreement entered into described the termination payment of £37,500 (six months' salary) as a redundancy payment. The tax tribunal held that the payment was taxable as earnings, since it was in reality a payment in lieu of notice (PILON) notwithstanding the way it was described in the compromise agreement as compensation for loss of employment. There was no proof that the payment was compensation for loss of employment rather than a surrender of the claimant's right to be paid six months' pay in lieu of notice; merely describing it as compensation in the compromise agreement was not evidence.

Redundancy payments can qualify for the £30,000 exemption provided they are paid "genuinely" on redundancy. The Revenue uses the strict definition of redundancy (closure of business or workplace or diminishing need for the employee to do the available work) to determine the genuineness of the redundancy and payments which are, in fact, a bonus paid for an employee's services during the notice period or during the employment generally will be taxable and subject to national insurance contributions.

Employers can apply for advance clearance under the Revenue's Statement of Practice 1/1994 (available on the Revenue website) to confirm that redundancy payments are genuinely made to compensate for loss of employment through redundancy.