Rules on severance payments in FE colleges have changed

What has changed? 

The College Financial Handbook sets out the rules that FE colleges must follow when they are considering offering a severance payment. A severance payment is monies paid to employees, contractors or others when they leave public service employment, outside of statutory or contractual entitlements. These payments may arise in cases of resignation, retirement, dismissal, or upon an agreed termination of employment. They are distinct from ex gratia or compensation payments. 

Previously, when a college was considering offering a staff severance payment, approval was required from the Department for Education (DfE) before any binding offer was made where the severance payment (including non-statutory or non-contractual element) was £50,000 or more, or where it was equivalent to three months' salary or more. In both cases this was gross, before deductions. 

We previously wrote in our article, ‘Severance payments in FE college: are the rules changing?’ that trusted sources indicated that this was going to change so that the requirement for DfE approval for severance payments equivalent to three month's salary would be removed. This has now happened.

The College Financial Handbook has, as of 22 October 2025, been updated and applies retrospectively. This means that from 1 August 2025: 

Where you are considering a staff severance payment including a non-statutory or non-contractual element of £50,000 or more (gross, before income tax or other deductions), DfE's approval must be obtained before making any binding offer to staff. 

Additionally, in accordance with HM Treasury's Guidance on Public Sector Exit Payments, colleges must also obtain prior DfE approval before making a special staff severance payment where any of the following apply: 

• an exit package of £100,000 or above includes a special severance payment
• the employee earns over £174,000
• a payment is novel, contentious or repercussive

Demonstrating good value for money

It remains the case though that colleges need to demonstrate value for money. You need to apply the same scrutiny to a payment under £50,000 as those over this limit and have a justified business case. 

For all severance payments, you must continue to consider the following: 

• Is it appropriate? For example, severance payments should not be made to staff with poor performance or in cases of misconduct.
• What are the associated costs and likelihood of successfully defending the case at tribunal? Where a legal assessment suggests you are likely to be successful, a settlement should not be offered.
• Can you clearly document the management and approval process which must take account of your own internal processes and employment law?
• Can you demonstrate that it is value for money?
• Do you have evidence to support any non-financial considerations?

You must also ensure that the use of confidentiality clauses does not prevent an individual's right to make disclosures in the public interest under the Public Interest Disclosure Act 1998. 

Our newsletters

We publish monthly employment and education newsletters. If you'd like to be added to the mailing list, please let me know.