The tax treatment of payments in lieu of notice paid on termination of employment (“PILONs”) is changing with effect from 6 April 2018. Currently, PILONs are subject to tax and National Insurance contribution deductions if they are contractual (or customarily paid on termination). Such payments are tax-free if they are non-contractual and therefore effectively amount to damages for loss of notice and breach of contract.
From 6 April 2018 all PILONS will be treated as “taxable earnings”, irrespective of whether they are contractual or non-contractual, and will be subject to tax and National Insurance contributions. It will therefore no longer be possible to agree an early termination, forego part or all of the notice period, and treat the equivalent of the notice pay as a tax-free compensation payment. The new rules relate to payments made on or after 6 April 2018, even if the termination took place earlier.
Normal termination payments will continue to benefit from the £30,000 tax exemption, but a new category called “post-employment notice pay” will be excluded from the exemption. Employers will therefore need to separate out the various elements of the payment made on termination of employment. There will also no longer be any advantage to not having a PILON clause in contracts of employment.
