New tax regime for PILONs

Under the current regime, the tax treatment of payments in lieu of notice to employees depends on whether there is a PILON clause in the employment contract:

• Contractual or discretionary PILON: Pay in lieu of notice is deemed to be “earnings” and subject to tax and NICs.
• No PILON: Payments can be deemed to fall under the head of “damages” for breach of contract and therefore within the £30,000 tax treatment regime.

For some time, the HMRC have been unhappy with employers/employees taking advantage of the lack of a PILON in the contract to pay/receive notice pay tax free and without charge for NICs. Under the new regime, it will be immaterial whether or not there is a PILON clause in the employment contract: all employees will now pay tax and Class 1 NICs on the amount of basic pay they would have received had they worked their notice period in full, regardless. Consequently, this amount will also become subject to employer’s NICs. Until HMRC issues further guidance on this point, it appears this may also apply regardless of how employment ended.

For employees who are terminated on and from 6 April, employers will now have to apply a formula to calculate “post-employment notice pay” and tax termination payments differently. A further explanation as to the steps to do so can be found here.

Sums received over-and-above this amount as genuine redundancy, ex-gratia or damages payments are still eligible for tax-free treatment up to the £30,000 cap.

Scheduled now for 6 April 2019: Employers will be charged NICs on termination payments over £30,000 which are currently subject to income tax only.