Income tax and national insurance contributions (“NICs”) must be paid on all payments in lieu of notice (“PILONs”) with effect from 6 April 2018
From 6 April 2018 all payments in lieu of notice (only where employment terminates on or after 6 April 2018) will be taxable, whether contractual or non-contractual. Income tax and national insurance contributions will be due on the amount of basic pay that an employee would have received if they had worked their notice in full.
The current tax rules on payments in lieu of notice:-
Currently, if you have a contractual right to make a payment in lieu of notice (‘PILON’), that payment is subject to income tax and national insurance contributions (‘NICs’).
If you don’t have a contractual right to make a PILON (because there is neither an express nor an implied term in the employment contract), any payment made in respect of an employee’s notice entitlement is generally regarded as ‘damages for breach of contract’ and the first £30,000 can be paid tax free and without deduction of NICs.
Tax rules that will apply to payments in lieu of notice from April 2018?
From 6 April 2018, all payments in lieu of notice will be taxable. The principle is relatively straightforward but there is a complex statutory formula for calculating the sum that should be taxed, known as ‘post-employment notice pay’ (‘PENP’). PENP is, generally, the salary the employee would have received during any unworked period of notice minus any contractual PILON. It is calculated by reference to:-
Basic pay only (before any salary sacrifice), disregarding bonus, overtime, commission, benefits in kind etc; and
How much statutory or contractual notice (whichever is longer) the employer is required to give to terminate the contract.
PENP is subject to income tax and NICs in full. The balance of the termination payment is eligible for the £30,000 tax exemption and full NICs exemption (provided it is a genuine ex gratia or redundancy payment).
At Gepp & Sons, our Employment Law Team will be happy to assist you with any aspect of employment law. If you seek advice, please contact Alexandra Dean, or Laura West on 01245 228141 or via deana@gepp.co.uk.
This is not legal advice; it is intended to provide information of general interest about current legal issues.
