Peter Mandelson is expected to receive a substantial taxpayer-funded payout after being sacked by Sir Keir Starmer as UK ambassador to the United States over his links to the convicted sex offender Jeffrey Epstein. The move has triggered political controversy, with critics questioning both Labour peer Lord Mandelson’s conduct and the Prime Minister’s handling of the dismissal.

Downing Street confirmed the decision on Thursday, citing the “depth and extent” of Lord Mandelson’s friendship with Epstein as “materially different” from what was disclosed during his vetting for the ambassadorship. Lord Mandelson, who was appointed in December 2024 shortly after Labour’s election victory, had been tasked with leading Britain’s post-Brexit trade relations with Washington. He played a visible role in negotiations earlier this year, meeting President Donald Trump to finalise a landmark deal.

The dismissal followed the release of US congressional documents containing previously undisclosed emails and photographs of Lord Mandelson with Epstein. Among the material was a 50th birthday note in which Lord Mandelson described Epstein as “my best pal.”

Records also showed Epstein paid more than $7,400 in travel costs for him in 2003. Other correspondence indicated the peer continued to support Epstein after his 2008 conviction for procuring a minor for prostitution.

Epstein, who died in prison in 2019 while awaiting trial on sex-trafficking charges, had maintained close ties with prominent figures in politics, business and academia.

The new revelations underlined the persistence of Lord Mandelson’s relationship with him into the late 2000s, including visits to Epstein’s New York townhouse.

Lord Mandelson has denied wrongdoing and insists he was transparent during his appointment process. He has refused to resign, leaving the Government exposed to possible legal action and a significant compensation bill.

Allies say he feels “ill-treated” and believe Sir Keir acted under political pressure rather than in the national interest. One supporter told The Times: “Peter couldn’t have foreseen this witch-hunt.”

The manner of the dismissal has itself become a point of contention. Sir Keir did not speak to Lord Mandelson directly before the announcement, and no formal HR procedure was followed.

Employment lawyers have suggested that the lack of due process could leave the Government vulnerable. One Whitehall insider said: “Politics dictated the outcome, but employment law doesn’t care about optics.”

There are precedents for six-figure payouts in similar cases. Sir Philip Rutnam received £340,000 in 2020 after resigning from the Home Office amid a dispute with then-home secretary Priti Patel.

Sir Philip Barton, a former Foreign Office permanent secretary, received more than £260,000 when leaving his post early.

As a fixed-term appointee serving at the Prime Minister’s discretion, Lord Mandelson’s contract is likely to include safeguards against abrupt termination.

Dave Penman, general secretary of the FDA union, said: “This will come down to a negotiation. Ignoring employment norms could end up costing the government dearly.”

The episode has also raised questions over Sir Keir’s judgment in appointing Lord Mandelson in the first place.

Critics argue that Lord Mandelson’s longstanding relationship with Epstein was already well known and should have disqualified him from such a sensitive diplomatic role.

One senior Conservative MP said: “The red flags were there.” Opposition figures accuse the Prime Minister of acting hastily to limit political damage once the new evidence emerged, while leaving the Government open to expensive legal consequences.

Beyond the ambassadorship, Lord Mandelson has rejected calls to step down from the House of Lords. Despite growing pressure from MPs across the political spectrum, he has told associates he has will not be relinquishing his seat. Sources close to him said: “He has no intention of giving it up.”

Lord Mandelson’s career has been marked by both high-level influence and repeated controversy. Twice forced to resign from cabinet roles under Tony Blair over financial scandals, he later returned to frontline politics and played a key role in New Labour’s strategy.

His resilience has been noted by both allies and detractors, though the Epstein revelations appear to have dealt the most serious blow yet.

For Sir Keir, the dismissal is intended to draw a line under a damaging episode at a time when maintaining strong relations with Washington is a priority.

However, with the prospect of a substantial golden handshake, criticism of the PM’s judgment, and pressure on Lord Mandelson to step aside from the Lords, the fallout is likely to continue.