Taxation of payments in lieu of notice (PILONs) and post-employment notice pay (PENP)
Produced in partnership with Sam Whitaker of Shearman & Sterling
Taxation of payments in lieu of notice (PILONs) and post-employment notice pay (PENP)

The following Tax practice note produced in partnership with Sam Whitaker of Shearman & Sterling provides comprehensive and up to date legal information covering:

  • Taxation of payments in lieu of notice (PILONs) and post-employment notice pay (PENP)
  • When is a PENP calculation required?
  • Notice periods in employment contracts
  • Types of PILON
  • The regime for taxation of all PILONs from 6 April 2018
  • Where there is an express or implied contractual PILON
  • Where there is no express or implied contractual PILON
  • Post-employment notice pay (PENP)
  • Example of the operation of the post-employment notice pay concept
  • Practical issues—communicating the tax treatment to employees
  • More...

The tax treatment of payments in lieu of notice (PILONs) fundamentally changed under the amendments to sections 402 to 404 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) (introduced through Finance (No 2) Act 2017) which became effective from 6 April 2018. In broad terms, the amendments mean all PILONs, whether paid pursuant to an (implied or express) contractual PILON provision or not, are fully taxable and subject to both employee and employer National Insurance contributions (NICs). This is achieved by an employer being required to carry out a post-employment notice pay (PENP) calculation. As set out below, this is necessary to allow employers to identify which element of a termination payment is taxable. As a result, the pre-2018 distinction between PILONs which were paid pursuant to an (express or implied) contractual PILON provision (which were treated as fully taxable) and those which were not paid pursuant to a contractual PILON provision (which were capable of benefiting from the £30,000 tax exemption and which were entirely free from NICs) no longer applies.

In addition, with effect from 6 April 2020, an employer Class 1A NICs liability arises on the amount of a termination payment that exceeds the £30,000 tax exemption threshold (ITEPA 2003, s 403), meaning the employer’s NICs position on termination payments mirrors that of income tax.

When is a PENP calculation

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