Payments in lieu of notice

Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP

The following Employment Tax guidance note Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP provides comprehensive and up to date tax information covering:

  • Payments in lieu of notice
  • What payments are PILONs?
  • Choice of contractual PILON or breach of contract?
  • Damages payments
  • Auto-PILONs

Payments in lieu of notice

Payments in lieu of notice are known as PILONs. In practice, this phrase is used to describe a range of payments made on termination of an employee’s employment. See EIM12975.

In essence, a PILON is a payment made to an employee when proper notice of termination is not given. The PILON is paid to compensate for the wages and benefits not received during what should have been the notice period.

What payments are PILONs?

In the House of Lords case of Delaney v Staples, Lord Browne-Wilkinson helpfully summarised payments that may be classed as PILONs into four categories. This case was not a tax case but is very useful in understanding the different types of payments that can be made. The categories are discussed below:

  1. an employer gives proper notice of termination to his employee, tells the employee that he need not work until the termination date and gives him the wages attributable to the notice period in a lump sum. In this case (commonly called ‘Garden Leave’) there is no breach of contract by the employer. The employment continues until the expiry of the notice. The lump sum payment is simply advance payment of wages and is taxable as earnings

  2. the contract of employment provides expressly that the employment may be terminated either by notice or on the making of a PILON (ie it contains a contractual PILON). In such a case if the employer dismisses the employee, it is not in breach of contract provided that it makes the PILON. As the payment is written in as a term of the contract, it is taxed as earnings under ITEPA 2003, s 62. See EIM12976 and Example 2 at EIM13924

  3. at the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on making a PILON. A payment of this nature is most likely to occur when a settlement agreement is entered int

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