When an employee’s employment is terminated, they are usually entitled to pay in lieu of notice (PILON). This can either be a contractual entitlement or can sometimes occur where an employer has a practice of making payments in lieu of notice to their employees.

Prior to the 6th April 2018, a contractual PILON payment was subject to tax and national insurance deductions (this has not changed) – a non-contractual PILON payment was capable of being paid to an employee, free from tax and national insurance deductions.

Post April 2018, the legislation states that where there is no contractual entitlement to PILON, employers will always have to deduct tax from any settlement amount which relates to “post-employment notice pay”. This is the basic salary the employee would have earned had they remained in employment for the notice period.

Calculating the amount of “post-employment notice pay” can be tricky as it depends on how regularly the employee is paid, the length of the notice period, and the amount of unworked notice. It is only the basic salary that is used when calculating the “post-employment notice pay” – bonuses and overtime should not be included.

Other termination payments may still benefit from the aggregate £30,000 tax free exemption.

There are further proposed changes in April 2019.

For further information on settlement agreements, please contact Renata Del Luongo on 01332 364436 or at legal@timms-law.com

Renata Del Luongo

May 2018