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Paying disgraced peer Peter Mandelson a controversial severance package of £75,000 broke Treasury rules, an MP has claimed.

Mandelson, a former Labour MP and Cabinet minister, was sacked as British ambassador to the US on September 11, 2025, following the publication of leaked emails which illustrated his continuing friendship with billionaire paedophile Jeffrey Epstein.

Sir Keir Starmer and the Government have been under mounting pressure to reveal how much they knew about the 72-year-old’s ongoing relationship with Epstein and why he was appointed to such a high-profile role in the first place.

Released “Mandelson files” last week showed the former ambassador sought a £500,000 payout upon being fired, but still received £75,000, which MPs now want back. Mandelson is also subject of an ongoing police investigation, but no charges have been brought

Inside the bundles of documents released concerning Mandleson’s appointment a “Proforma for Special Severance Business Cases” discussing his payoff was sent from the Foreign Office to the Treasury on September 30, 2025.

It states “given the reputational impact for HMG (His Majesty’s Government), a modest settlement as proposed is the recommended course of action”.

However, in what appears to be a direct contradiction, the Treasury’s own guidance dismisses “reputational damage” as a reason for making such a payment.

Under “Use of Special Severance Payments”, it notes in black and white: “Departments should not use special severance payments as an easy alternative to proper management action, e.g., to avoid difficult decisions, disciplinary processes, unwelcome publicity, or reputational damage.”

In a Commons debate on Monday, Alicia Kearns, Conservative MP for Rutland and Stamford, highlighted the Treasury guidance and said the “British people had to fork out for a payout even though Treasury rules say that severance payments cannot be used”.

When asked if he thought “no rules were broken with Mandelson’s payoff?”, Sir Keir Starmer’s Chief Secretary Darren Jones MP told the House: “On severance payments, the documents were published in a bundle last week, and they speak for themselves.”

Ms Kearns told the Daily Express: “The Government has been caught red-handed breaking Treasury rules. It’s just common sense that you don’t pay severance to someone dismissed for gross misconduct.

“But not only did Starmer pay him, their own paperwork reveals it was to try and salvage Labour’s reputation. Treasury rules explicitly forbid that – the money must be paid back, even if it comes from Labour Party coffers.”

A Treasury source said the issue had been “politicised” and that guidance for severance payments also includes justifications for payments including potential future larger financial losses from legal action. They said the severance package potentially saved hundreds of thousands of pounds in potential legal costs.

They added that HMT could “disregard irrelevant factors such as embarrassment” and that the severance pay decision “was anchored in cost control and proper process”.