There is currently some uncertainty around the tax treatment of payments in lieu of notice (PILONs). This can depend upon whether the relevant contract of employment includes a PILON clause (in which case the payment must usually be taxed as earnings), or there is no such clause (in which case the payment may sometimes be classed as damages and avoid tax).
HRMC are now removing this inconsistency. From 6 April 2018, all PILONs will be subject to income tax and class 1 NICs, whether or not a PILON clause exists. Furthermore, employers will not get away with trying to roll up or disguise the notice pay within a larger termination payment. Any such payment will need to be split as between:
- the portion representing basic pay for any part of a notice period that has not been served (taxed as earnings);
- the portion benefiting from the current £30,000 tax exemption; and
- any amount in excess of £30,000 (currently subject to income tax and, from April 2019, also subject to NICs).
(Source: Section 5 of the Finance (No.2) Act 2017; Sections 402A to 402E, Chapter 3, Part 6 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA); Regulation 2 of the Social Security (Contributions) (Amendment No. 2) Regulations 2018)