Pay in Lieu of Notice (PILON)
From 6th April 2018, all payments in lieu of notice (PILONs) – whether contractual or non-contractual, will be fully subject to tax and national insurance.
Under previous rules that applied up to 5th April 2018 if a PILON was paid in termination or redundancy situations, and was covered by contractual provision then it should have been subject to tax and National insurance deductions in full. ‘Contractual’ included not only the terms of the contract of employment but also other written provisions (i.e. staff handbook and company redundancy policy).
However, when the contract of employment was ‘silent’ on PILON the payment should have been put through the payroll as free of tax (within the £30,000 threshold) and National insurance. However, this was complicated by the fact the HMRC stated that non-contractual PILONs that are made customarily or automatically on termination are subject to tax and National insurance, making clarity in this matter difficult.
The new regulations, therefore, clarify the situation and remove any element of doubt.
Post-employment notice pay (PENP)
From 6th April Post-employment notice pay (PENP), has been introduced, which represents the amount of basic pay the employee will not receive due to the termination of their contract without proper notice being given.
PENP is calculated by applying a formula to the total amount paid in connection with the termination of an employment. This element of the payment should be subject to tax and national insurance. The remaining balance of the termination payment (not including holiday pay, normal salary payments, commissions, overtime and termination bonuses) which is not PENP may be included within the overall £30,000 exemption for tax purposes and is free from National insurance.
The rules regarding the tax and National insurance treatment of termination payments still remains complex and care should be exercised to make sure you get it right. Whilst this change simplifies the PILON status, it introduces new terminology and guidelines are still a little unclear from HMRC. If in any doubt ask for advice.
Contact the payroll team by completing the form on our website. Alternatively, you can call us on 0208 977 3559 at our Hampton Wick office to speak to an adviser.