TAX CHANGES TO PAYMENTS IN LIEU OF NOTICE
A payment in lieu of notice (PILON) is money paid to an employee when their employment is ending (for whatever reason) and the employer does not want the employee to work their notice period.
Currently, where a PILON is a contractual right, the employee must pay tax on the amount in the usual way, as it is deemed to be normal earnings.
However, where a PILON is made in the absence of a contractual provision, the first £30,000 can be paid tax free and no NI contributions are due. This is because the payment is regarded as damages for breach of contract, rather than normal earnings.
For obvious reasons, non contractual PILONs are attractive options to employers and employees alike, and are often used in settlement agreements.
However, the rules are often flouted and therefore, with effect from the 6th April 2018, the current contractual/non-contractual distinction will be removed and all PILONs will be treated as earnings. This means all employees will pay tax and NI on the amount of basic pay that they would have received had they worked their notice period in full.
If you do not have a PILON clause in the contract (so that you could benefit from the current rules outlined above), then you may now wish to consider adding a clause as there can be some clear benefits from doing so. For example, you can specify that all company property needs to be returned immediately where a pay in lieu of notice is made.
Please contact me if you would like to discuss this further or would like some wording drafted.
Fiona Haworth. You can contact Fiona on firstname.lastname@example.org
If you feel that you need guidance or advice on this matter, please call Practical HR on 01702 216573 or email Fiona on the above.