Macleod & MacCallum – Employment Law & HR Support

Taxing Times for Termination/PILON Payments

What Has Changed?

From 6 April 2018, there has been a change to tax legislation affecting payments in lieu of notice (“PILONs”), upon employment ending. A PILON situation exists where it is agreed, between employer and employee, that the employee will receive a sum of money instead of working all, or part, of their notice.

It had previously been generally safe to assume that a PILON payment could be made free of tax, provided there was no PILON clause within the contract. This was, however, subject to such payments not being an automatic employer response upon employment ended. This was on the basis that these payments were felt to be “arising out of termination” and therefore not subject to tax as employment income.

However, from 6 April, all PILONs (whether or not a clause exists) must properly be subject to income tax and also Class 1 NICs. This will be the case provided both the termination date, and the date payment is made, are on, or after, 6 April.

Separately, an employer will also be required to pay NICs on any part of a genuine ex gratia termination payment (which now cannot include any PILON payment), over the continuing tax-free threshold of £30,000.

Analysis of Change

The absence of a relevant PILON Clause could often be used as a way of helping an agreement be reached upon employment ending. However, this change will now, in certain circumstances, directly affect how much an employee might receive “in hand”. The direct result of this could well mean an employer paying slightly more, to achieve an agreed settlement. Advisers, of course, also need to properly explain the impact of such change and the drafting of any Settlement Agreement (particularly from a tax perspective) will likely be affected.

Any discussions surrounding an employee’s employment ending, carries with it legal risk, and specialist advise should always be taken.

Mac & Mac Employment Team, Euan Smith and Graham Laughton, act for a number of local businesses and can be contacted on 01463239393 or employment@macandmac.co.uk.

April 27, 2018