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Where an employment is terminated on or after 6 April 2018 and there is no express or implied contractual PILON clause in the employee’s contract, despite the PILON being non-contractual, it is still fully subject to tax and employer’s National Insurance contributions (NICs).
For this purpose, the post-employment notice pay (PENP) formula is what determines what is treated as the non-contractual PILON. If the termination award is less than the amount of the PENP as determined by the PENP formula, the entire award is the non-contractual PILON that is fully taxable as earnings. If the termination award exceeds the PENP, only the part of the termination award that is equal to the PENP calculation is the non-contractual PILON that is fully taxable as earnings. The first £30,000 of the excess over the PENP amount can benefit from the £30,000 tax exemption.
The PENP formula is set out in section 402D of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and the employee’s ‘basic pay’ is an essential component. Normally, basic pay means the employee’s basic pay in respect of the last pay period of the employee to end befor
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