Don’t get strung up on PILONs

Until 6 April 2018, PILONs are subject to income tax and national insurance deductions if they are paid pursuant to a contractual right (e.g. a clause in the employee’s employment contract saying “the company reserves the right to pay you in lieu of all or part of your notice period”, or words to that effect). However in the absence of any such contractual provision, payments of this nature are generally viewed as damages for breach of contract and can be paid free of tax and national insurance up to a threshold of £30,000.

This distinction is being removed with effect from 6 April 2018. Any part of a termination payment paid on or after that date which represents ‘post- employment notice pay’ cannot be included within the £30,000 allowance and will be subject to income tax and national insurance contributions.

‘Post-employment notice pay’ is the employee’s basic pay for what would have been the notice period, if it had been worked. Compensation for loss of benefits, overtime, commission, bonuses and allowances can still benefit from the £30,000 exemption.

The formula for calculating ‘post-employment notice pay’ is set out (in somewhat complicated fashion) in statute and may not accord exactly with your normal method of calculating and accruing pay. This is particularly so if the employee is not paid monthly, or if the payment is in lieu of a portion of the notice period which does not amount to whole months.

These new rules are likely only to increase the costs for employers, because severance packages are usually negotiated by reference to the net benefit to the employee. After all, the employee’s net loss will still be the same, and therefore it is the employer which is likely to bear the financial burden of swelling the Exchequer’s purse!

Still in the dark about severances? Matthew is holding a breakfast seminar on Tuesday 26 June at Cheltenham’s National Star College to explore the issues you need to consider when coming to a settlement agreement. Click here to book (‘early bird’ ticket price of £12.50 until 1 April).

Matthew Clayton heads up our Legal 500-rated employment team. He handles the full range of contentious and non-contentious employment law issues for a client base which includes multi-national companies, owner-managed businesses and not-for-profit organisations. His particular specialisms include complex staff restructurings and employment issues concerning business transfers. He is a member of the Employment Lawyers’ Association, and a GL Ambassador for GFirst LEP.