Tax Change for PILON Payments

  • Joanne Baker-Gabb
  • Thursday, May 31st, 2018

Employment contracts often provide that employers can terminate the employment immediately by making a payment in lieu of notice (PILON), rather than having to give the full period of notice. A PILON made under a contractual provision of this kind is taxable under section 62 of Income Tax (Earnings and Pensions) Act 2003  (ITEPA 2003) and liable to National Insurance Contributions under section 6(1) of Social Security Contributions and Benefits Act 1992 (SSCBA 1992).

Where the contract is silent and payments are not made on an automatic basis or pursuant to a discretionary right and an employer unilaterally dismisses an employee and makes a payment in lieu of proper notice, the payment will be treated as a payment of damages. It will therefore fall within section 401 of ITEPA 2003 and, if it does not qualify for the foreign service exemption, it will be tax free up to £30,000 (section 403, ITEPA 2003). There will also be no liability for National Insurance Contributions.

However, from the 6 April 2018, all PILONs, whether contractual or not, will be classed as earnings and taxed under s62 ITEPA 2003. The Finance (No. 2) Act 2017 has inserted new sections 402A – E into ITEPA 2003, effectively meaning that any termination payment should be assessed to see if any of it could relate to notice pay which the employee had, or might have had, under a PILON.

For queries in relation to the tax status of PILON payments or any payments made to employees on termination please do not hesitate to get in touch.