Ill health dismissal payment: what you're owed and how it's worked out

Your sick pay has run out, HR has booked a “final review meeting”, and you want to know what money you will walk away with. There is no automatic ill-health dismissal payment. You are owed your notice pay, every day of holiday you have built up (including holiday carried over while you were off), and any wages still due. Whether your notice is paid in full or not at all comes down to one rule about your contract, explained below.

A worked example: the same person, two contracts

Take someone on £28,000 a year who has worked for their employer for 6 years. They have been off sick for most of the year, their sick pay has run out, and they are dismissed 7 months into the holiday year with notice paid in lieu. They took no holiday this year and had 4 weeks carried over from last year. A week’s pay is £28,000 ÷ 52 = £538.46.

Statutory notice after 6 years is 6 weeks. The only difference between the two columns is the notice period written in the contract:

The person with the longer notice period gets £3,231 less, purely because of what the contract says about notice.

The notice pay rule that decides most of the money

The law protects your pay during the statutory minimum notice (one week per full year of service, up to 12 weeks). If you are off sick during that notice, you get full normal pay, even if your sick pay has run out. But that protection only applies if your contractual notice is less than one week longer than the statutory minimum.

If your contract gives you notice that is a week or more longer than statutory, you lose the protection and are paid whatever you would get for being off sick. Acas gives the example of someone on Statutory Sick Pay only: they get SSP during their notice, and if their 28 weeks of SSP have been used up, they may get nothing at all.

• Notice at or close to statutory: full pay for the notice period, whatever your sick pay position.
• Longer contractual notice, sick pay still running: you get sick pay for the notice weeks. If that is SSP alone, 13 weeks at £123.25 would be £1,602, as long as your SSP lasts that long.
• Longer contractual notice, sick pay used up: possibly nothing for the notice period.

Two things can change this. If your contract has a pay in lieu of notice clause, read how it is worded: some promise basic salary for the notice period, and an employer that pays under that clause pays what it says. And if you are dismissed during company sick pay at full pay, the rule makes no difference because sick pay is already full pay. Our guide to pay in lieu of notice covers how PILON is worked out.

Holiday pay: usually bigger than people expect

You keep building up the statutory 5.6 weeks a year while off sick. If illness stopped you using it, up to 4 weeks can be carried into the next leave year, and it must be used within 18 months of the end of the year it was earned. When your job ends, every untaken day of that has to be paid.

Points that catch people out:

• It is paid at your normal rate, not sick pay. In the example that is £538.46 a week, not £123.25.
• Contractual holiday above 5.6 weeks may or may not build up while off sick. Your contract or sickness policy decides.
• Only 4 weeks carry over as of right after sickness. The extra 1.6 weeks (the bank holiday equivalent) only carries over if your contract or a workplace agreement allows it.
• Holiday from more than 18 months after the leave year it was earned is normally lost, so a very long absence spanning several years does not keep adding up.

Use the holiday entitlement calculator for this year’s figure, and our guide to unused holiday pay when you leave for the daily rate sums.

How the final payment is taxed

Notice pay and holiday pay are taxed as normal wages, with Income Tax and National Insurance. They do not get the £30,000 tax-free allowance that redundancy pay gets. But after months on sick pay, your income for the tax year is often low, so a lot of the tax taken off your last payslip comes back.

In the example, say the £7,144 is paid in November (month 8 of the tax year) before your P45, and you’ve had about £6,000 of pay and SSP since April. Payroll takes roughly £953 in tax that month, because it only gives you 8/12 of your Personal Allowance so far. If you earn nothing else before 5 April, your tax bill for the whole year is about £115, so around £838 is due back. National Insurance of about £488 is worked out month by month and is not refunded.

HMRC normally repays overpaid tax after the tax year ends. If you have stopped work and are not claiming taxable benefits such as New Style ESA, you can claim it sooner with form P50. If the money is paid after your P45, it will be taxed on code 0T with no allowance at all, and the overpayment can be bigger. Our guide to checking if you paid too much tax shows how to claim it.

Severance offers and the disability tax exemption

Some employers offer a lump sum on top, usually through a settlement agreement in which you agree not to make a claim. Nothing obliges them to, and the amount is a negotiation. The offer usually comes when there is a risk of an unfair dismissal or disability discrimination claim, or when it is quicker for both sides than a long capability process. Your employer normally pays for a solicitor to advise you on the agreement before you sign.

The tax on a lump sum like this is where most guides stop short. A non-contractual termination payment gets the first £30,000 free of tax and has no employee National Insurance. On top of that, a payment made on account of injury or disability can be completely exempt from tax, whatever the size, under section 406 of the Income Tax (Earnings and Pensions) Act 2003. HMRC expects medical evidence that the condition prevents you doing your job, and the payment must be made because of it.

Below £30,000 this makes no difference to you. Above it, it can be worth thousands. If your settlement is large and the reason is your health, ask for the agreement to say clearly which part is paid because of your disability or injury. Tax tribunals have allowed the exemption on part of a payment where that part was clearly linked to the condition, and refused it where the paperwork was vague.

Ill-health retirement and income protection

If you are in a public sector pension scheme, ask about ill-health retirement before you are dismissed. The NHS, local government, civil service, teachers’, police and firefighters’ schemes can all pay your pension early, without the usual early retirement reduction, if a scheme doctor agrees you can no longer do your job. Some pay extra on top for more serious conditions. In the Local Government Pension Scheme your employer has to get an independent doctor’s opinion before deciding.

This can be worth far more than anything else on this page, and in some schemes a resignation or a dismissal that goes ahead first makes it harder to claim. Our NHS pension calculator and LGPS pension calculator show what your pension is worth now.

If your employer has a group income protection policy and you are receiving payments from it, check what happens when your job ends. Some policies stop paying once you are no longer an employee. That is a big loss to weigh up before agreeing to anything, and a common reason employers delay a dismissal or offer a settlement instead.

Resign or be dismissed?

Resigning sometimes makes sense, for example when you have another job or simply want it over with. But it rarely pays more, so get the pension and notice position in writing first.

Benefits after you leave

You can claim from the day your job ends. New Style Employment and Support Allowance depends on the National Insurance you paid or were credited in the last two full tax years, not on savings or a partner’s income. Universal Credit depends on your household’s income and savings, and includes extra money if a work capability assessment finds you have limited capability for work-related activity. You need a fit note for both.

Timing matters for Universal Credit. Your final notice and holiday pay counts as earnings in the assessment period it is paid in, so a large final payment can reduce or cancel your first award. It can still be worth claiming straight away, so the claim is in place for the following month.

When the dismissal might be unfair

An ill-health dismissal can still be unfair. Your employer should have recent medical evidence (usually from occupational health), have met you to discuss it, looked at adjustments and other jobs you could do, and given a reasonable time to recover. If your condition counts as a disability under the Equality Act, dismissing you without making reasonable adjustments can be discrimination.

• Unfair dismissal currently needs 2 years’ service. For dismissals with a leaving date on or after 1 January 2027 that drops to 6 months.
• Disability discrimination needs no minimum service.
• Time limits: for a dismissal on or after 1 October 2026 you have six months less one day to start Acas early conciliation. It was three months before that date.

Appeal internally first, in writing, and keep copies of medical reports and meeting notes. Acas and Citizens Advice give free help, and a union rep can attend meetings with you.

The bottom line

Check your contract’s notice period against the statutory figure first, because it decides whether your notice is paid in full or not at all. Count every week of holiday, including up to 4 carried over from your time off, and claim it at your normal pay. If you are in a public sector pension scheme, raise ill-health retirement before the dismissal goes through.

Check your figures

Use the holiday entitlement calculator for your unused leave, the sick pay calculator to see what sick pay you are still due, and the take-home pay calculator for your normal weekly pay. Our guides to company sick pay and Statutory Sick Pay explain what you should have been paid while off.

Figures use 2026/27 rates for England, Wales and Northern Ireland. Employment law in Northern Ireland differs in places, including unfair dismissal and tribunal time limits. This is general information, not legal advice. Acas offers free, confidential help.