PILON Changes by Lianne Payne
Changes to payments in lieu of notice and the effect on settlement agreements
With effect from the 6th April 2018, all payments in lieu of notice (“PILON”) will be taxable and subject to NI. This is regardless of whether the payment is made to the employee pursuant to the employment contract or a settlement agreement.
PILONs are relied upon by many employers and allow them to pay an employee their basic salary (in a lump sum) for the notice period rather than require the employee to work their notice period.
PILONs and can be beneficial for a number of reasons. For example, it allows the employer to bring a disgruntled employee’s employment to an end sooner and promptly put in place a replacement, prevents the accrual of additional benefits such as holiday or a bonus payment, and assists with the protection of its confidential information.
PILONs are often found in settlement agreements which is a legally binding contract between an employee and an employer where in return for consideration (usually financial), the employee agrees to enter into the agreement and waive their rights to take their employer to an Employment Tribunal or Court for any claims they may have arising out of their employment or its termination.
Until now, the position relating to the taxable status of a PILON has been unclear. Previously, if the employment contract included a PILON clause enabling the employer to pay an employee in lieu of their notice period, such a payment would be taxed as a contractual benefit on the premise that it was essentially an ‘advanced payment of wages’. If the employment contract did not contain a PILON clause, then potentially the payment could be paid without deductions for tax and NI. This was on the basis that the payment was not a contractual benefit and by electing to make a PILON in circumstances where they had no contractual right to do so, the employer was essentially breaching the employee’s contract and the employee may be entitled to be compensated for that breach.
There are of course exceptions to this position, for example where an employer has a custom and practice of making PILON payments to departing employees. This may be deemed to have become an implied term of the employee’s contract and therefore would be subject to tax.
Needless to say, the position has caused confusion for employers. The change in the law will therefore bring welcome clarification of the position, albeit, it may mean that employers now incur additional costs in relation to settlement agreements as undoubtedly, a departing employee will drive a harder bargain now that it cannot benefit from this ‘windfall’ in connection with any PILON.
An employer will now need to ensure that it correctly taxes any PILON made to an employee to avoid an inference that it has defrauded HMRC of the tax due to it on this sum. A prudent employer should also carefully review the wording of any settlement agreement that it uses to ensure that it is consistent with this change in the law. Whilst the inclusion/exclusion of a PILON clause in a contract of employment has now lost its significance for the purpose of the taxable status of a PILON, an employer may wish to consider whether to amend its employment contracts to include the right to make a PILON to ensure that it is not in breach should it elect to do so and can therefore seek to rely on any post termination obligations contained within the employment contract.
For further advice or assistance with any employment law matter, contact Lianne Payne, Head of Employment: Lianne@askewslegal.co
