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Hello Cliff, I am one of the experts on Just Answer and pleased to be able to help you with your question.
Your termination payment, being under 35K is tax free. You should appeal against HMRC's assessment which is done by simply writing them a letter pointing out this small matter and telling that Department politely to wind their necks in.
I always advise never to telephone HMRC. The personnel who man these lines respond from a very limited number of stock answers and anything out of the ordinary leaves them unable to cope. Always write, then you have a hard copy of what has been discussed and their response.
I do hope that I have been able to show you a way forward in this matter.
There is an error in my answer, the tax free limit is of course 30K, but in this case its doesn't alter the price of cheese as my old boss was wont to say.
If the employer thinks differently why did they not deduct tax and NI in the first place?
Delighted to have been of assistance, Cliff.
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Thank you for your support.