Employment Tax

Payments in lieu of notice

Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP
  • 22 Mar 2022 12:24

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 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 an employee, but does not require the employee to attend work up to the termination date and pays them the wages attributable to the notice period. This situation is commonly called ‘Garden Leave’, see the Garden leave and the right to work guidance note. There is no breach of contract by the employer. The employment continues until the expiry of the notice. If the payment is made as a lump sum payment in advance; this is simply advance payment of wages. The wages are subject to tax and NIC as earnings as usual

  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

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