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PILONs, tax and termination payments

New rules are planned to come into force from 6 April 2018 which will affect the taxation of some non-contractual payments in lieu of notice.

Background

In general, if a contract of employment gives an employer the right to make a payment in lieu of notice (“PILON”), such payment is subject to tax deductions and national insurance contributions in the normal way.

However, where there is no contractual right to make a PILON, an employer will be in breach of contract if it does not allow the employee to serve their notice period and instead makes a non-contractual PILON. In these circumstances, employers have been able to pay the monies that the employee would have earned in their notice period tax free (up to £30,000) as the payment is treated as damages for breach of contract.

Changes

Under the Finance (No 2) Act 2017, new provisions will apply, from 6 April 2018, whereby post-employment notice pay (“PENP”) will no longer benefit from the £30,000 tax free exemption.

If an employer makes a non-contractual PILON as part of a termination payment, that part of the payment will be regarded as PENP and the basic pay that would have been paid for the notice period will be taxable.

Comment

Employers should take the planned provisions into consideration if they are looking at entering into settlement agreements and/or foresee making termination payments after 6 April. For example, if an employee enters into a settlement agreement in March but the termination payment is not made until after 6 April 2018, any non-contractual PILON will be caught by the proposed new rules.

If you would like to speak to us about settlement agreements, please feel free to email us  or contact us on 0191 282 2880 for a no obligation chat.

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