You work for the NHS, a government department, local authority or another public-sector organisation. A workplace dispute has been dragging on for months and, eventually, you and your employer reach the outline of a settlement.
The compensation figure has been discussed, the terms are taking shape, and you may even think the difficult part is over.
Then you are told: “The payment still needs approval.”
For someone used to thinking of a settlement as an agreement between employer and employee, that can come as a surprise. Why should HM Treasury have anything to do with the end of your employment? And if Treasury approval is needed, does that mean the settlement could still fall apart?
This is where public-sector settlements can work very differently from those in the private sector.
If you work in the public sector, there are additional rules governing certain payments made when your employment ends. These are known as special severance payments.
HM Treasury has issued guidance controlling when these payments can be made and when Treasury approval is required.
The rules matter because, even where you and your employer are prepared to settle an employment dispute, your employer may not necessarily have authority to make the payment without further approval.
The guidance was updated in 2025 to give some public-sector employers greater freedom to approve payments themselves. However, important restrictions remain.
What is a special severance payment?
Put simply, a special severance payment is generally a payment made when someone’s employment ends which they are not already legally or contractually entitled to receive.
For example, special severance payments can include:
- compensation paid under a settlement agreement;
- payments agreed through mediation;
- certain payments in lieu of notice, depending on the contractual position;
- continued benefits or allowances after employment has ended;
- certain pension-related payments; and
- in some circumstances, contributions towards legal fees.
Not every payment you receive when leaving a public-sector employer will be a special severance payment.
For example, payments such as contractual or statutory redundancy pay and payment for accrued but untaken holiday are generally outside the special severance payment rules. A payment ordered by a court or Employment Tribunal is also treated differently.
The important question is therefore not simply “How much am I receiving?”
It is “Why am I receiving this particular payment, and am I already entitled to it?”
Why does HM Treasury get involved?
The answer is relatively straightforward: public money is being spent.
HM Treasury expects public-sector organisations to justify payments made to employees when they leave.
Special severance payments are therefore expected to be exceptional rather than routine. An employer should be able to demonstrate that a payment is lawful, appropriate, and represents value for money.
This creates an additional hurdle which employees in the private sector do not normally encounter.
A private employer might decide that paying £30,000 to settle a dispute makes commercial sense because defending an Employment Tribunal claim could cost almost as much in legal fees and management time.
A public-sector employer may reach exactly the same commercial conclusion but still have to consider whether it has authority to make that payment under the Treasury rules.
What changed in 2025?
Previously, special severance payments generally required prior HM Treasury approval.
The updated guidance gives certain public-sector bodies more freedom to approve some payments internally.
In broad terms, a Departmental Accounting Officer may now approve certain special severance payments of less than £100,000 without first obtaining HM Treasury approval.
However, there is an important warning here: The £100,000 figure is not a blanket exemption.
A payment below £100,000 can still require Treasury approval depending on the circumstances.
Restrictions also apply to certain senior and highly paid employees.
When is HM Treasury approval still required?
This is one of the most important parts of the guidance. HM Treasury approval remains necessary in certain cases, including where a payment is considered “novel, contentious or repercussive.”
Those words are Treasury terminology, but the basic idea is that additional scrutiny is required where there is something unusual, controversial or potentially wider-reaching about the proposed payment.
Examples can include situations where:
- the payment could set a precedent for other employees or cases;
- the case has wider implications for government policy;
- the proposed payment is particularly high-profile or contentious;
- the payment may be unaffordable;
- the employee is particularly senior; or
- the payment could be seen as rewarding poor performance or failure.
There is another particularly important example for employees pursuing Employment Tribunal claims.
What if your employer thinks it would win at Tribunal?
HM Treasury’s guidance specifically addresses cases where a public-sector employer is considering paying money to settle legal proceedings.
Where legal advice suggests that the employer has a greater than 50% chance of successfully defending the claim, Treasury approval may be required. For employees, that can initially seem strange.
Employers settle Employment Tribunal claims for many reasons. An employer might believe it has a 60% chance of winning but still decide that settlement is sensible because of:
- legal costs;
- management time;
- the uncertainty of litigation;
- the time employees will spend preparing for and attending a hearing;
- reputational considerations; or
- the commercial benefit of bringing the dispute to an end.
The Treasury rules add another consideration. Where public money is involved, an employer may need to justify why it is paying compensation to settle a claim which its lawyers believe it is more likely than not to successfully defend.
That does not mean settlement is impossible. It means the employer may need additional approval before it can proceed.
What about confidentiality clauses?
This is another area which can easily be overlooked. Confidentiality clauses are common in settlement agreements. They can restrict what the employer and employee are permitted to say about the dispute, the settlement or its terms.
Under the Treasury guidance, however, the inclusion of confidentiality provisions can be relevant to whether a proposed special severance payment requires Treasury approval. This means confidentiality wording should not simply be treated as standard boilerplate in a public-sector settlement agreement.
If your employer says that a confidentiality clause affects the approval process, that may be a genuine consequence of the Treasury rules rather than simply an excuse to delay settlement.
What about NHS employees?
The position is particularly important for NHS employees. The relaxation introduced by the updated guidance does not apply in the same way to NHS Trusts, NHS Foundation Trusts, Integrated Care Boards and Ambulance Trusts.
Those organisations do not have the Departmental Accounting Officers required to exercise the delegated authority under the guidance.
As a result, HM Treasury approval continues to be required for special severance payments made by these NHS bodies.
This can be particularly relevant for doctors, nurses, managers, and other NHS employees negotiating settlement agreements.
It also means that an NHS settlement can take longer to conclude than an employee might initially expect.
Does Treasury approval mean your settlement has been rejected?
No. There is an important distinction between:
“Your employer cannot make this payment without approval”
and:
“Your employer is not prepared to make this payment.”
They are not necessarily the same thing.
If you are told during settlement negotiations that Treasury approval is required, it can be sensible to establish:
- which part of the proposed settlement requires approval;
- why the employer considers it a special severance payment;
- whether HM Treasury approval is actually required or whether the employer has delegated authority;
- whether the approval process has already started; and
- whether any proposed settlement offer is conditional upon approval.
You should also be careful about assuming that every payment in your exit package is affected.
Not every part of your settlement is necessarily a special severance payment
Imagine, for example, that your proposed exit package contains:
- £4,000 of outstanding salary;
- £2,000 for accrued holiday;
- £8,000 of contractual notice pay; and
- £25,000 as compensation for giving up potential Employment Tribunal claims.
Those payments are not necessarily treated in the same way simply because they appear in the same settlement agreement.
Some may represent money which you are already entitled to receive. Others may constitute the additional payment being made to settle the dispute.
This is why the breakdown of the settlement package matters, not simply the headline figure.
What should you do if your employer mentions Treasury approval?
Do not assume that it means settlement is impossible. Equally, do not ignore it. Ask your employer or solicitor to clarify what approval is required and why.
In particular, you will want to understand:
- whether the proposed compensation is caught by the special severance payment rules;
- which elements of your exit package are affected;
- who has authority to approve the payment;
- whether HM Treasury itself needs to approve it;
- whether approval has already been requested; and
- what happens if approval is refused.
These questions are particularly important where you are being asked to agree terms before the approval process has been completed.
The key point
HM Treasury’s updated guidance gives some public-sector employers greater flexibility, but it does not remove the controls surrounding special severance payments.
For employees, three questions sit at the heart of the guidance:
- Is the payment a special severance payment?
- Does the employer have authority to approve it itself?
- If not, does HM Treasury approval need to be obtained before the settlement can proceed?
If you are negotiating a settlement agreement with a public-sector employer, these questions should be considered early rather than after everything else has apparently been agreed.
Being told that a settlement requires Treasury approval does not necessarily mean that your employer is refusing to settle. But it may mean there is an additional approval process standing between an agreement in principle and a payment which can actually be made.
How Magara Law can help
At Magara Law, we advise employees on settlement agreements, workplace disputes and Employment Tribunal claims.
If you work for the NHS, Civil Service or another public-sector organisation and have been offered a settlement agreement, we can advise you on the agreement itself, the employment claims you may be giving up and how the special severance payment rules may affect your proposed settlement.
If you have received a settlement agreement or are currently negotiating an exit with a public-sector employer, contact Magara Law for specialist employment law advice.
Call 01869 325 883, email hello@magaralaw.co.uk or book your consultation direct. Once you have scheduled your consultation, subscribe to our YouTube channel and follow us on social media for all the latest employment law updates and information you need.
This article provides general information only and does not constitute legal advice. The application of HM Treasury’s guidance will depend on the public-sector organisation concerned, the nature of the payment and the individual circumstances of the case.