Back

Our offices will be closed over the Easter weekend from 5:30pm on Thursday 28 March. We will reopen as usual at 9am on Tuesday 2 April.

Get in Touch Menu

Don’t get strung up on PILONs

29 March 2018

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. 

We're here to help
Disclaimer: All legal information is correct at the time of publication but please be aware that laws may change over time. This article contains general legal information but should not be relied upon as legal advice. Please seek professional legal advice about your specific situation - contact us; we’d be delighted to help.
Contact
Matthew Clayton MA LLM (Cantab), CIPP/E
Partner
View profile
Mathew Clayton
Related services
Share this article
Resources to help

Related articles

Business Immigration: Significant changes to take place in April 2024

Employment & business immigration

Last December, the Home Secretary announced a five-point plan to reduce immigration in the UK, with most measures to be implemented early this year. Today, it can be said that…

Klára Grmelová MGR (LLM Czech)
Solicitor

Constructive dismissal & delayed resignation

Employment & business immigration

Constructive dismissal and delayed resignation can prove to be difficult situations for some employers. Our team of experts look into a case that could help when looking to tackle issues…

Hayley Ainsworth BA, MSc
Associate, solicitor

Embracing neurodiversity at work

Employment & business immigration

We’re supporting Neurodiversity celebration week, which takes place from 18th to 24th March 2024. Here, our employment law team share insight into neurodiversity in the workplace and what employers can…

Jenny Hawrot LLB (Hons)
Partner
Contact us