College Financial Handbook 2026: what colleges need to know

While much of the existing framework remains familiar, the 2026 version introduces several important changes which have direct implications for colleges as employers.

Increased scrutiny of special staff severance payments

Perhaps the most significant employment-related changes concern special staff severance payments. 

As a reminder, these are payments paid to employees outside statutory or contractual requirements when leaving employment in public service, whether they resign, retire, are dismissed or reach an agreed termination of employment. They are different to ex gratia and compensation payments which tend to arise in circumstances other than leaving employment. Ex gratia payments are subject to DfE approval, at any level, and there are restrictions on the levels of other payments that can be made without DfE approval. 

Colleges will be aware that the use of special staff severance payments should be exceptional and that they must obtain DfE approval before making a special staff severance payment where: 

• An exit package of £100,000 or more includes a special staff severance payment
• The employee earns more than £174,000; or
• The payment is considered novel, contentious or repercussive

A notable and important change in the 2026 handbook is the additional clarification of what is regarded as a novel, contentious or repercussive payment. The 2025 handbook cited exit packages containing confidentiality agreements as an example, and this remains unchanged. However, the 2026 handbook now expressly states that a payment will also fall into this category where legal advice indicates that the college has more than a 50% chance of successfully defending a claim in a tribunal or court. 

In these circumstances, you will need to explain why you propose settling the claim and obtain the necessary DfE approval before proceeding, regardless of level. This reflects closer scrutiny where you have a strong legal defence but nevertheless wish to reach a negotiated settlement. 

Consistent with the previous version of the handbook, DfE approval is also required where a staff severance payment includes a non-statutory or non-contractual element of £50,000 or more (gross, before income tax or other deductions). 

The 2026 handbook also continues to set out a number of factors that colleges must consider before making an offer of a staff severance payment, regardless of its value. It is clear from the amendments that there is a firm expectation that legal advice is sought, that alternative options have been properly explored and the justification is documented. 

Specifically, colleges are advised to keep clear records and retain evidence of the management and approval process. These records should include: 

• The legal advice received
• The reasons for the decision
• The evidence supporting the decision
• How the college assessed value for money

You should review settlement processes in light of these changes and understand when DfE approval is needed, when legal advice is required and what records must be kept. 

Confidentiality clauses

The 2026 handbook also clarifies the rules surrounding confidentiality provisions in association with special staff severance payments.

It makes clear that confidentiality clauses connected to special severance payments are always novel, contentious or repercussive and cannot be used without prior DfE approval. 

The handbook further confirms that confidentiality clauses must not: 

• Prevent an individual from making protected whistleblowing disclosures; or
• Restrict the DfE from obtaining information it requires for regulatory purposes. 

New expectations for chief financial officers

The 2026 handbook continues to require you to appoint a named individual with responsibility for financial management. However, it now states that the chief financial officer (CFO) should attend finance and committee meetings to support effective financial oversight. 

It has also strengthened requirements around the employment status of CFOs. Previously, you were expected to notify the DfE if you proposed appointing a CFO who was not an employee. The handbook now makes this a mandatory requirement. You must notify the DfE in advance if, in exceptional circumstances, you intend to appoint a non-employee CFO, even if the contract is temporary. 

Additional requirements apply when recruiting CFOs for colleges with more than 3,000 students:

• From 1 August 2026: recruitment exercises should specify that applicants should be qualified accountants and members of the relevant professional accountancy body.
• From 1 August 2027: recruitment exercises must include this requirement. If a college proposes to appoint a CFO who is not a qualified accountant, it must notify the DfE in advance and explain its reasons for doing so. 

These changes may affect recruitment strategies, succession planning and the content of job descriptions. 

Senior pay controls

The 2026 handbook also updates the provisions dealing with senior pay controls. 

It now clarifies that central government senior pay controls apply to any role that meets HM Treasury’s senior pay thresholds. DfE approval remains necessary for certain high-value appointments and remuneration packages. 

One notable change is the increased flexibility where a role has previously received HM Treasury approval. The previous allowance for increases of up to 2% without new approval has increased to 5%, provided certain conditions are met. You must still notify the DfE within one month when relying on this flexibility. 

Electric vehicle salary sacrifice schemes

The 2026 handbook contains a new section dealing with electric vehicle salary sacrifice schemes. 

Colleges can offer these schemes without obtaining prior DfE approval, provided you have robust safeguards in place to ensure that no cost or liability falls on the college if an employee fails to meet their contractual obligations to the scheme provider. You must clearly document these safeguards and follow the relevant government guidance. 

The new guidance provides greater clarity for colleges considering introducing or expanding electric vehicle salary sacrifice schemes.

What should colleges do now?

The handbook contains several changes that directly affect colleges in their role as employers. 

You should therefore:  

• Review CFO criteria, recruitment plans and succession arrangements
• Check your senior pay approval processes
• Review your electric vehicle salary sacrifice schemes
• Mitigate risk of breach by informing relevant teams so they understand when DfE approval is required for entering into severance payment arrangements
• Seek legal advice on the merits of and justification for paying severance payments
• If you use a settlement precedent, take advice on it

The overall direction of travel is clear. The DfE expects colleges to take a more structured and evidence-based approach to workforce-related financial decisions. 

We can support you, please contact Jenny Arrowsmith for more information. 

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