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Removal of cap on public sector exit payments – information for schools/academies

Since 4 November 2020 public sector exit payments have been capped at £95,000. On 12 February 2021 the government issued a Treasury Direction which removed the cap and new legislation implemented on 19 March 2021 formally revoked the cap.

Who does it effect?

The £95,000 cap previously applied to public sector employers, which includes schools and academies.  It applied to all payments relating to an employee’s termination of employment between 4 November 2020 and 19 March 2021, including redundancy, compensation, severance packages, voluntary exit payments and other contractual payments in consequence of the termination of employment or loss of office of an employee.

Why has the cap been removed? 

The Government’s justification is that the cap had unintended consequences but it was also controversial.  In March 2021 the Courts were due to hear an application for Judicial Review by various government association and trade unions who were challenging the introduction of the cap.

How does this affect schools?

Under the new legislation, employers are required to repay any affected employee (or repay other persons including potentially public sector pension schemes in relation to those employees) the additional payments which they would have received had the cap not been in place, plus interest at 8%.  Schools and academies who have made capped exit payments between November 2020 and March 2021 should review those payments and calculate what sum the employee would have received, together with the interest due.

It is worth remembering that only a small number of employees will be caught by this change, as very few Schools and Academies will have made significant exit payments which exceed the cap between November 2020 and March 2021.  It is also worth remembering that the Academies Financial handbook requires Academies to seek authority from the ESFA where the non-contractual/non-statutory payment to the employee exceeds £50,000 or more.

So what about the future? 

The guidance on the removal of the exit pay cap states “For the avoidance of doubt, it is still vital that exit payments deliver value for the taxpayer and employers should always consider whether exit payments are fair and proportionate. HM Treasury will bring forward proposals at pace to tackle unjustified exit payments.” It is therefore anticipated that a new cap will be re-introduced in some form in the future, especially given the need for the Government to control financial spending as a result of Covid.

If you need advice about this then please do not hesitate to get in touch.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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