Payment in Lieu of Notice

25 Sep 2018 Joanne Duguid    Last updated: 25 Sep 2018

As of April 2018 payments made in lieu of notice are now taxable. This article briefly defines 'Payment in Lieu of Notice', outlines when they might be used and advises of the tax changes that you may need to be aware of.

Pay in lieu of notice, or PILON for short, is a payment made to an employee by an employer for a notice period that the employee has not had to work.

For example, if an employee has a month notice period, the employer might decide that they want today to be the last day of employment – but they will be paying the employees wages in lieu of this notice for that one month, even though they are not physically coming in to work any more.

Payment in lieu of notice is often discussed in relation to settlement agreements as such agreements tend to occur after either a dispute or a redundancy and there is some reason why an employer prefers not to continue to interact with a particular employee on a day to day basis.

Payment in Lieu of Notice - three points to remember:

  1. Payment in lieu of notice means that an employee receives notice pay but does not actually work their notice period;
  2. Pay in lieu of notice is very common when an employee leaves after redundancy or a dispute; and
  3. Notice pay can no longer be tax free but it is open to the parties to vary the notice period.

Is Payment In Lieu of Notice Taxable?

Before April 2018, if a contract of employment allowed the employer to pay in lieu of notice (PILON) this payment was taxable. If the contract of employment did not allow the employer to make a PILON payment, this could be tax-free if the payment (and any other associated compensation) was under £30,000.

From April 2018, the new legislation requires the employer to account for any basic pay that the employee would have received if they had worked their notice.  This basic pay is treated as earnings and as such is subject to tax and national insurance contributions, even if the contract of employment made no provision for a PILON payment.

An additional change from April 2019 will be the requirement for employers to pay national insurance contributions on any portion of a termination payment over £30,000. 

For further information regarding Payment in Lieu of Notice please refer to the following links:

http://www.acas.org.uk/index.aspx?articleid=4540.

https://www.gov.uk/government/publications/income-tax-and-national-insurance-contributions-treatment-of-termination-payments/income-tax-and-national-insurance-contributions-treatment-of-termination-payments

Every effort is made to ensure that the contents of this document are accurate, but the advice given should not be relied on as a definitive legal statement.
joanne.duguid@nicva.org's picture
by Joanne Duguid

Human Resources Manager

[email protected]

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