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Changes to Payments in Lieu of Notice

When an employee’s employment is terminating, payments in lieu of notice (“PILONs”) allow employers to pay an employee their basic salary (often in a lump sum) for the notice period which they would otherwise be required to work. This is called a notice payment.

PILONs are used by many employers and are often found in settlement agreements. The issue with such payments is the tax status. As a general rule if your employment contract includes a PILON clause (a clause allowing the employer to pay you in lieu of your notice period) your notice payment will be taxed as this is a contractual benefit. If the employment contract is silent on PILONs then generally, the payment will not be subject to NI and income tax, as the payment is not a contractual benefit.

This is subject to a number of exceptions including how the employer normally deals with PILON clauses. If the employer normally makes payments in lieu of notice, despite not having PILON clauses in their employment contracts, this may be viewed as an implied term and would therefore be subject to tax.

This has caused confusion for both employers and employees and often led to ambiguity as to the actual amount an employee would get as notice pay.

However, times are changing and as of 6 April 2018 all payments in lieu of notice, whether contractual or not, will be fully taxed and subject to NI. Although this brings clarity to the tax status of these payments it will also bring increased cost for both employer and employee. Employers may still want to include PILON clauses in employment contracts as it will stop employer being in breach of contract when making payments in lieu of notice which will mean the employee will remain bound by any post termination restrictions.

If you have any queries or would like to discuss this further please do not hesitate to get in contact with one of the team.