Taxation of payments in lieu of notice (PILONs) and post-employment notice pay (PENP)—from 6 April 2018
Produced in partnership with Sam Whitaker
Taxation of payments in lieu of notice (PILONs) and post-employment notice pay (PENP)—from 6 April 2018

The following Tax guidance note Produced in partnership with Sam Whitaker provides comprehensive and up to date legal information covering:

  • Taxation of payments in lieu of notice (PILONs) and post-employment notice pay (PENP)—from 6 April 2018
  • Notice periods in employment contracts
  • Types of PILON
  • The regime for taxation of all PILONs from 6 April 2018
  • Post-employment notice pay (PENP)
  • Whether the parties can agree a shorter notice period
  • Taxation on summary or constructive dismissals
  • Where employee has shorter notice period than employer
  • Basic pay—low or no pay, or unusually high amounts of pay or backdated pay
  • Basic pay and ‘allowances’
  • 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). The previous 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.

HMRC has stated it considers the new regime to apply only where the termination of employment itself occurs on or after 6 April 2018. As a result, any terminations which took place on or before 5 April 2018 will, according to