Outplacement and retraining for leaving employees

When an employer pays for outplacement counselling or a retraining course for someone who is leaving, the cost is free of income tax if the conditions in sections 310 and 311 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) are met. Both need two years’ service and an offer made to employees generally or to a class of them, not hand picked individuals. These amounts sit outside the £30,000 termination payment threshold, but the retraining exemption can be withdrawn later if the employee stays on or is taken back.

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Why do leavers need their own exemptions?

The general exemption for work related training in section 250 is designed for people staying in their job, and is covered in our guide to employer funded training. A course to help a redundant warehouse supervisor become an electrician is not work related training for the current job. Without a specific rule, help of this kind given in connection with a termination would fall within section 401 ITEPA, the charge on termination payments and benefits, and use up part of the £30,000 threshold or be taxed above it.

HMRC’s Employment Income Manual at EIM13120 lists outplacement counselling among payments and benefits made on an employee’s behalf that are excepted from the section 401 charge. Retraining is dealt with by its own exemption in section 311. Both are exemptions from charge only: EIM13745 and EIM05005 confirm that an employee who pays for counselling or retraining personally gets no tax deduction.

What conditions apply to outplacement counselling?

Section 310 exempts services provided to a person in connection with the cessation of their employment, and the payment or reimbursement of fees for those services and related travel, if all of Conditions A to D are met (plus E for travel):

Condition A: the only or main purpose is to help the person adjust to the end of the employment, find other gainful employment, or both. Self employment counts.
Condition B: the services consist wholly of giving advice and guidance, imparting or improving skills, or providing the use of office equipment or similar facilities.
Condition C: the person has been in the employment that is ceasing throughout the two years ending when the services begin or, if earlier, when the employment ends.
Condition D: the opportunity to receive the services on similar terms is available generally to employees or former employees, or to a particular class or classes of them.
Condition E: travel expenses must be ones that would qualify for mileage allowance relief or be deductible under Part 5 ITEPA, on the assumption that receiving the services is a duty of a continuing employment and the employee pays the costs.

EIM13745 notes that outplacement can range from a single interview to support lasting several months. CV writing workshops, interview coaching and access to a desk and phone for job hunting all fit within Condition B. A cash allowance the employee can spend as they wish does not.

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What retraining costs can be paid tax free?

Section 311(2) covers four kinds of retraining course expenses paid or reimbursed by the employer: course fees, travel expenses connected with the course, fees for examinations taken during or at the end of it, and the cost of books essential for attending it. Travel is subject to the same assumptions as outplacement: it must be travel that would be deductible if attending the course were a duty of the employment and the employment continued.

The course itself must provide training designed to impart or improve skills or knowledge relevant to, and intended to be used in, gainful employment of any description, including self employment. It must be entirely devoted to teaching or practical application of those skills, and must last no more than two years. HMRC says at EIM05010 that if the course exceeds the time limit, no exemption is due on any part of the cost.

What are the timing and service rules for retraining?

Section 311(4) sets four employment conditions:

the employee begins the course while employed or within one year after the employment ends;
the employee leaves within two years after the end of the course and is not employed again by the same employer within two years of leaving;
the employee was in that employment throughout the two years ending when the course begins or, if earlier, when the employment ends; and
the opportunity is available on similar terms to fellow employees generally, or to a particular class of them.

The full time requirements that once applied to both the employment and the course were removed from 6 April 2005, when the maximum course length was also raised from one year to two (EIM05005). Part time staff and part time courses can now qualify.

What happens if the conditions later fail?

Section 312 deals with two later failures: the former employee does not start the course within a year of leaving, or the employee stays on, or is taken back, outside the time limits. In either case:

the employer or former employer must notify HMRC within 60 days of coming to know of it (section 312(4));
HMRC can assess the tax under section 29 of the Taxes Management Act 1970, within six years after the end of the tax year in which the failure first occurs (section 312(3));
if HMRC suspects an unreported failure, it can require information by notice, giving at least 60 days to respond (section 312(5) and (6)).

The exemption is not lost just because the person fails to find work, or ends up in a field unconnected with the course (EIM05030). Separately, EIM05040 warns that where the conditions were never met when the payments were made, for example because part of the course was recreational, HMRC can recover PAYE from the employer in the normal way.

How do these exemptions fit with the £30,000 threshold and National Insurance?

HMRC treats qualifying outplacement as excepted from the section 401 charge (EIM13120), and section 311 is drafted as an outright exemption (“no liability to income tax arises”). Qualifying costs should therefore not use up the £30,000 threshold in section 403, which applies only to amounts within the termination payment charge. Cash compensation in the same package does count. Since 6 April 2020 employers pay Class 1A National Insurance on termination awards above £30,000 that are taxed under section 403 (NIM13201), at 15% for awards paid from 6 April 2025. HMRC’s table at NIM14110 lists counselling under section 310 and retraining under sections 311 and 312 as exempt from both income tax and Class 1A. For the Class 1 and Class 1A rules on the rest of the package see National Insurance on termination payments, and for notice pay see post employment notice pay.

Sections 310 and 311 are also on HMRC’s list of excluded exemptions for optional remuneration arrangements at EIM44131, so they continue to apply where the employee gives up part of a cash payment in exchange for the support.

How does this work in practice?

Illustration only. A printing firm closes a site and offers every employee with two or more years’ service up to £3,000 of outplacement support from a specialist provider, or up to £5,000 towards a retraining course starting within a year of leaving. Each leaver also gets statutory redundancy pay and a £10,000 ex gratia payment. Alan, with six years’ service, takes a 9 month accountancy technician course costing £4,200 plus £300 of exam fees and textbooks. All £4,500 is exempt under section 311, separately from his cash payments. Eighteen months later the firm reopens a smaller plant and wants to hire Alan again. It should check the timing: if he is taken back within two years of leaving, the exemption is withdrawn and the firm must tell HMRC within 60 days.

What mistakes come up most often?

Offering enhanced outplacement only to senior managers named in the settlement agreement, rather than to a defined class.
Paying for support for leavers with less than two years’ service and treating it as exempt.
Paying cash in lieu of outplacement, which is simply part of the termination payment.
Funding a course that runs longer than two years, which loses the whole exemption.
Forgetting the 60 day notification when a retrained leaver is taken back on.

Counselling for current staff falls under a different exemption; see welfare counselling.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.