Q&As

Does an employer or an employee have to pay tax on a payment in lieu of notice?

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Published by a LexisNexis Employment expert
Published on: 07 November 2014
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The answer will depend on:

  1. •

    the terms of the employee's Contract of employment

  2. •

    what exactly the payment is for and how it has been calculated (and not just how the payment has been labelled)

  3. •

    whether the employer and employee have agreed a tax indemnity between them

For further information on the tax treatment of PILONs generally, see our Practice Notes:

  1. •

    Termination payments taxed as Earnings

  2. •

    Termination payments qualifying for £30,000 exemption

  3. •

    Taxation of payments in lieu of notice or PILONs—pre-6 April 2018 [Archived]

For further information on Payment In Lieu Of Notice generally, see our Practice Note Payment in lieu of notice (PILON).

Express contractual right to make a PILON—fully taxable in hands of employer

Many contracts contain the right for the employer to make a payment in lieu of notice (PILON) to the employee, instead of the employee working out their notice. The PILON clause will usually set out how the payment is calculated, typically by reference

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Jurisdiction(s):
United Kingdom
Key definition:
Payment In Lieu Of Notice definition
What does Payment In Lieu Of Notice mean?

Payment In Lieu Of notice (‘PILON’) clauses give the employer the express right to make a payment instead of giving notice, allowing the employee’s immediate termination and removal from the workplace. In the absence of a contractual PILON, employees may remain in employment for the notice period and be paid for it, and attempted summary dismissal will be ineffective unless the employee accepts that repudiation.

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