New rules that PILON the pressure!
The pressure in this case is the ticking clock regarding payment of tax and NI on the notice element of termination payments - payment in lieu of notice (PILON).
The Finance (No 2) Act 2017 makes changes to the rules on the taxation of exit payments, whether by resignation or under
a Settlement Agreement. And it comes into effect for all terminations after 6th April 2018.
The effect of the rule is that whereas some departing employees could take benefit of their notice pay in full by virtue
of a specific clause in their contract of employment, they will no longer be able to do so. However, it does give
certainty in an area that has so much depended on the drafting of the termination clause in any given contract.
The current (at the time of writing in March 2018) rule is that where the employer reserves the right to pay notice in lieu (a ‘PILON’’),
then as it is encompassed within the contract, it is classed as ‘pay’ with the deductions for tax and NI made.
Where there is no right to pay in lieu as expressed in the contract, to do so is a breach of contract, entitling the
employee to damages. Damages are not taxed (up to the first £30,000) and therefore, even though the measure of the damages
is the pay itself, the tax and NI are not deducted.
So, what does it all mean? Well, after 6th April, all departures will have the tax and NI deducted and the contract becomes
irrelevant in that respect. Also, given that HMRC may scrutinise agreements to leave, they may tax a payment of
(say) £20,000 after someone has left, even though it is described in its entirety as compensation. If, for example,
the employee left without serving notice, HMRC may wish to take a slice of the cake for themselves, equating to the tax
and NI that would have been paid if notice had been given.
As a company with many years’ experience in dealing with negotiated exits, Nigel French and Associates Limited would be pleased
to advise you in respect of this change in the law, or any other severance arrangements.