payment in lieu of notice

Changes to taxation of termination payments came into force in the United Kingdom on 6 April 2018. The new rules will mean that income tax and national insurance contributions (NICs) will be payable on all payments which relate to an employee’s notice period.

The position prior to 6 April was that a “termination payment” (being any payment that is not already chargeable to income tax) could be paid tax free up to £30,000. However, any payments made pursuant to the contract of employment including a contractual payment in lieu of notice (PILON) would be subject to tax in the usual way.  One particular area of issue was the taxation of discretionary PILONs.  Whilst a discretionary PILON may be outside the contract and therefore could arguably fall within a true termination payment,  where such a payment has become “customary” then the UK tax authority (HMRC) has sought to tax that non-contractual PILON.