Special Severance Payments: New Scrutiny for Public Sector Exit Deals

HM Treasury has updated its guidance on special severance payments, with a renewed focus on approval, transparency, governance and value for taxpayers’ money.

Special severance payments are payments made when someone leaves public sector employment which go beyond normal statutory, contractual or other legal entitlements. They can be appropriate where a carefully considered payment resolves a workplace dispute, avoids unnecessary litigation or supports organisational change. However, because public money is involved, employers must be able to show that the payment is justified, proportionate and properly approved. HM Treasury states that these payments cost the Government millions of pounds each year and must represent value for money and be fair to taxpayers.

What Are Special Severance Payments?

Special severance payments are payments connected with the termination of public sector employment which do not correspond to an established contractual, statutory or other legal right. The label attached to the payment is not decisive. The key issue is whether any part of the exit package goes beyond what the individual is legally entitled to receive.

Examples may include payments under settlement agreements, continuing benefits after the exit date, loan write-offs, gardening leave, honorarium payments, hardship payments, retraining payments linked to termination, compensation in lieu of notice and payments agreed through mediation. Depending on the contract and circumstances, pay in lieu of notice, pension strain payments and legal fees within a settlement agreement may also fall within the rules.

They are different from statutory redundancy pay, contractual redundancy pay, payment for untaken annual leave and sums ordered by a court or tribunal, which do not normally constitute special severance payments.

Why Public Sector Exit Deals Need Scrutiny

The updated guidance does not prevent public sector employers from settling employment disputes. It recognises that settlement may sometimes be appropriate.

However, special severance payments should remain exceptional. Employers must consider whether alternatives have been explored, whether the amount is reasonable, whether the payment is supported by evidence and whether it represents value for money. HM Treasury also makes clear that special severance payments should not be used as an easy alternative to proper management action, including difficult decisions, disciplinary processes or reputational concerns.

This is particularly important where a payment involves senior staff, disputed legal claims, performance or conduct concerns, confidentiality wording, or wider public or reputational interest.

Approval Requirements

Departmental Accounting Officers can approve special severance payments that are not novel, contentious or repercussive. The current HM Treasury guidance does not require Treasury approval simply because a non-NCR payment exceeds £100,000 or another financial threshold. It expressly states that payments of £300,000 or more which are not novel, contentious or repercussive do not require Treasury approval.

Arm’s Length Bodies, including NHS organisations, must seek approval from the Accounting Officer of their sponsor department for all special severance payments, regardless of value. HM Treasury approval is still required where a payment is novel, contentious or repercussive. Where such a payment is £300,000 or more, approval from the Chief Secretary to the Treasury is also required.

Public sector employers should consider approval requirements before any offer or commitment is made. HM Treasury says approval must be sought in good time, departments should allow at least 20 working days for assessment, and approval must be confirmed in writing.

Novel, Contentious or Repercussive Payments

A payment may be novel, contentious or repercussive where it could attract public attention, set a precedent, raise wider policy issues or create concern about the use of public funds.

Examples include cases where legal advice suggests the employer has more than a 50% chance of successfully defending the claim, where the payment involves a senior employee, where it is unaffordable, where it could set a precedent, where it is high-profile, where the settlement agreement contains a confidentiality clause, or where the payment could be seen as rewarding poor performance or failure.

Those factors do not mean settlement can never be appropriate. They mean the decision requires closer scrutiny and, where required, external approval.

Settlement Agreements and Confidentiality Clauses

Settlement agreements remain an important way of resolving employment disputes. However, where a settlement agreement includes a payment beyond statutory, contractual or other legal entitlements, it is a special severance payment and must be authorised before the settlement is agreed, unless it falls within the relevant delegation.

HM Treasury’s default approach is not to settle. A special severance payment in a settlement agreement will only be considered where attempts have been made to resolve the dispute without such a payment and either legal advice clearly recommends settlement or, where legal advice is finely balanced, there is a clear value-for-money case for settlement.

Confidentiality clauses require particular care. They must not prevent protected whistleblowing disclosures or interfere with regulatory reporting obligations. Where a settlement agreement contains a confidentiality clause, the payment is treated as novel, contentious or repercussive, and HM Treasury approval must be obtained before any offer is made.

Academy Trusts and Further Education Colleges

Academy trusts and further education colleges face additional controls and should treat special severance payments as governance decisions, not simply HR decisions.

For academy trusts, the current DfE academy severance guidance states that prior DfE approval is required where the proposed special staff severance payment is £50,000 or more, where the trust is under a Financial Notice to Improve or Notice to Improve, where an exit package including a special severance payment is £100,000 or more, or where the employee earns over £174,000, excluding employer pension contributions.

The Academy Trust Handbook 2026, which takes effect from 1 October 2026, confirms that special staff severance payments are paid outside statutory or contractual requirements, that DfE approval is required for a non-statutory or non-contractual element of £50,000 or more, and that prior DfE approval is also required for exit packages of £100,000 or more, employees earning over £174,000, and payments that are novel, contentious or repercussive.

The handbook also states that confidentiality clauses in respect of special severance payments are always novel, contentious or repercussive and must not be used unless prior DfE approval has been obtained. Such clauses must not prevent whistleblowing or prevent the DfE from obtaining information for its regulatory role.

For further education colleges, the College Financial Handbook 2026, which takes effect from 1 August 2026, aligns special severance payment requirements with HM Treasury guidance. It requires DfE approval where an exit package of £100,000 or more includes a special severance payment, where the employee earns over £174,000, where the payment is novel, contentious or repercussive, or where the non-statutory or non-contractual element is £50,000 or more. It also confirms that confidentiality clauses linked to special severance payments require prior DfE approval.

Reporting and Compliance

Public sector bodies must report exit payments in annual reports and accounts in line with the Government Financial Reporting Manual. This includes banded reporting of exit payments and information about special severance payments, including the number made, total expenditure and the highest, lowest and median values.

Departments and organisations must also report all special severance payments made during the financial year to HM Treasury within three months of the financial year-end. The report must include details such as the recipient’s grade, reason for exit, value of the payment and whether it fell within the relevant delegation.

Accounting Officers remain responsible for compliance. Breaches may include unauthorised offers, failure to obtain approval, exceeding approved sums, failing to report payments or failing to follow the guidance. HM Treasury may impose sanctions, including budget deductions, revocation of delegated authority or increased spending controls. The maximum financial sanction is the higher of five times the special severance payment or £10,000.

What Public Sector Employers Should Do

Public sector employers should review their exit payment and settlement agreement procedures to ensure they reflect the updated guidance.

Before proposing a special severance payment, employers should identify the legal basis for each element of the exit package, separate contractual and statutory entitlements from discretionary payments, obtain legal and HR advice where appropriate, and record why the payment represents value for money.

They should also assess early whether the payment may be novel, contentious or repercussive, particularly where the case involves senior staff, confidentiality wording, disputed claims, performance or conduct issues, or potential wider implications for future settlements.

The updated guidance does not prevent sensible settlement. It does, however, require public sector employers to approach special severance payments with discipline, transparency and a clear focus on value for taxpayers’ money.