PILON (payment in lieu of notice) is a payment made to an employee when their employment has been terminated immediately without notice.
How should an employer deal with it?
PILON only arises when you want an employee to leave straight away therefore ending employment immediately and is a payment to compensate the employee for money they would have earned during their notice period if they had worked it. It is different from ‘gardening leave’, in which the employee is still in employment during the notice period and is paid, even though he or she is not present at work.
PILON will usually depend on what provision has been made for it in the contract of employment. In some instances, a contract may specify that termination can be made immediately by making a payment in lieu of basic salary for the notice period. Benefits and other extra costs that would have accrued during the notice period may not need to be paid. Employers are generally required to pay benefits and any extras when the contractual provision for PILON doesn’t specify what the pay should be, or if there is no contractual clause for PILON.
Employers need to know that without contractual provision, a termination of employment with PILON is likely to be a breach of contract. Usually the employer would compensate for this by including all the remuneration and benefits the employee would have been entitled to during the notice period. To avoid any later disagreement, employers could include a payment for any holiday that may have accrued during the period, even though they may not technically be required to.
Sometimes there can be confusion about when the termination date falls in a PILON situation. To make sure there are no disputes, it is always advisable to make this clear in the contract, whether it’s the date notice of termination is given, or the date the PILON is made or in the end of what would have been the notice period. Some employers prefer to give notice of termination and make the PILON at the same time so that there are no misunderstandings.
Usually in the event of a dismissal for gross misconduct, PILON is not normally paid.
Currently an employer may pay up to £30,000 free of tax and National Insurance but as of 6th April this is set to change in an attempt to make termination payments ‘fair’ and provide more clarity on the rules behind the payments. From this date all employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice, even if they are not paid a contractual PILON. This means the tax and NICs consequences are the same for everyone and it is no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.
Here is a quick overview of the changes:
- PILON will be subject to deductions for income tax and National Insurance contributions. This is irrespective of whether there is a PILON clause in the contract of employment;
- Employers National Insurance contributions (but not employee NI) will be payable on any part of a compensation payment that is taxable; and
- Foreign Service relief will be abolished.
The good news:
- The £30,000 tax exemption will stay in place.
- The tax treatment of legal fees paid under a settlement agreement will remain as it is now.
- Statutory redundancy payments remain exempt from income tax and NICS.
If you need help or guidance regarding PILON please do get in touch.