Under FRS 102 Section 28, redundancy and other termination benefits are expensed immediately, but a liability is recognised only once the employer is demonstrably committed: it has a detailed formal plan and no realistic possibility of withdrawing from it. They are measured at the best estimate of the cost of settling the obligation at the reporting date, based on expected take up for voluntary schemes and discounted if payable more than 12 months later.

What counts as a termination benefit?

Paragraph 28.1(d) of FRS 102 defines termination benefits as employee benefits provided in exchange for ending employment, either because the employer decides to terminate employment before normal retirement date or because an employee accepts voluntary redundancy in exchange for those benefits. Paragraph 28.31 adds that the commitment can come from legislation, from contracts or agreements with employees or their representatives, or from a constructive obligation based on business practice, custom or a desire to act equitably.

In practice this covers statutory redundancy pay, enhanced redundancy terms, payments in lieu of notice and other ex gratia leaving payments. Salary for a notice period that the employee actually works is different: it is pay for service, recognised as a short term benefit as the work is done under paragraphs 28.3 and 28.4. Holiday pay owed on leaving was already earned through service and should already sit in the holiday pay accrual, so it should not be counted twice.

When is the employer demonstrably committed?

Paragraph 28.34 permits a liability and expense only when the entity is demonstrably committed either to terminating the employment of an employee or group before normal retirement date, or to providing termination benefits under an offer made to encourage voluntary redundancy. Paragraph 28.35 says that commitment exists only when there is a detailed formal plan and no realistic possibility of withdrawal.

A footnote to paragraph 28.35 points to paragraph 21.11C for the features of a detailed formal plan. That paragraph lists the business or part of the business concerned, the principal locations affected, the location, function and approximate number of employees to be compensated, the expenditure to be undertaken and when the plan will be implemented. For a restructuring provision, paragraph 21.11C also requires a valid expectation in those affected, created by starting to implement the plan or announcing its main features to them.

A board decision that has not been communicated is usually reversible, so it does not create a liability on its own. If the plan is announced after the year end, paragraph 32.11(e) treats the announcement or start of a major restructuring as a non adjusting event that would generally be disclosed, not provided for.

Employment law affects the timing. GOV.UK explains that collective consultation rules apply when 20 or more employees are to be made redundant within 90 days at one establishment, with minimum consultation periods before dismissal of 30 days for 20 to 99 redundancies and 45 days for 100 or more. Consultation must be carried out with a view to reaching agreement, including ways of avoiding or reducing redundancies. Where numbers or terms could still change materially through consultation, judgement is needed on whether the employer is already without realistic possibility of withdrawal and how much of the cost can be reliably estimated.

How are termination benefits measured?

Paragraph 28.36 measures termination benefits at the best estimate of the expenditure needed to settle the obligation at the reporting date. For a voluntary redundancy offer, the measurement is based on the number of employees expected to accept. Paragraph 28.37 requires discounting, using the high quality corporate bond rate in paragraph 28.17, where benefits are due more than 12 months after the reporting date.

The estimate usually starts from the statutory entitlement, which depends on age, length of service and weekly pay subject to a cap (see statutory redundancy pay), then adds contractual or enhanced terms and payments in lieu of notice. Paragraph 28.33 notes that a termination may also cause a curtailment of pension or other benefits, which is accounted for separately; for a defined benefit scheme that means following the curtailment rules in defined benefit pension accounting.

How does this fit with restructuring provisions under Section 21?

A restructuring often produces two kinds of cost. Payments to staff for leaving fall under Section 28. Other costs that arise directly from the restructuring, such as lease exit costs or contract cancellation penalties, fall under Section 21 and its rules on provisions and contingencies, which also use the paragraph 21.11C test. Paragraph 21.11B forbids provisions for future operating losses, so the running costs of a site until it closes, including salaries of staff who keep working, are not provided for.

What does a worked example look like?

Illustration only. A company with a 31 March 2027 year end decides in February 2027 to close a depot. Its board approves a plan naming the site, the 15 roles affected, the cost and a closure date of June 2027, and staff are told on 10 March 2027. The company also offers voluntary redundancy to 40 staff at another site and, based on interest shown, expects 10 to accept.

Item Basis £
Depot: statutory and enhanced redundancy 15 named employees, terms in plan 180,000
Depot: payments in lieu of notice For staff not required to work notice 45,000
Voluntary scheme 10 expected acceptances at an average of £12,000 120,000
Total termination benefit liability 345,000

Salaries of depot staff working until June are not included. A third site where the board approved closure on 25 March but told nobody until April would have no liability at 31 March; it would be disclosed as a non adjusting event if material.

What must be disclosed?

Paragraph 28.43 requires, for each category of termination benefit, disclosure of the nature of the benefit, the accounting policy, the amount of the obligation and the extent of funding at the reporting date. Paragraph 28.44 recognises that uncertainty about how many employees will accept an offer creates a contingent liability, which Section 21 requires to be disclosed unless the possibility of an outflow is remote. In the example, the chance that more than 10 staff accept would be described as a contingent liability.

How are termination costs treated for tax?

For the employer, HMRC’s guidance at BIM46510 says an accounting provision is allowable only if it relates to allowable revenue expenditure, is in line with generally accepted accounting practice, does not conflict with a statutory timing rule and is estimated with sufficient accuracy. Sections 76 to 79 of the Corporation Tax Act 2009 give a specific deduction for statutory redundancy payments and approved contractual payments, and where the trade or part of it permanently ceases, allow additional payments up to three times the statutory amount. The employee’s tax and National Insurance position, including the £30,000 threshold, is explained in tax on termination payments.

What mistakes come up in practice?

  • Providing at the year end for a restructuring that was only discussed or approved privately.
  • Including the cost of staff who will keep working until closure, or future losses of the site.
  • Measuring a voluntary scheme at the number of staff invited rather than the number expected to accept.
  • Counting accrued holiday pay twice, once in the holiday accrual and again in the redundancy liability.
  • Missing the pension curtailment effect where leavers belong to a defined benefit scheme.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.