New Rules on PILONS

What is happening to PILONS?

With effect from 6 April 2018 the tax treatment of payments in lieu of notice paid on termination of employment (PILONS) are changing.

Currently, PILONS are subject to tax and national insurance contribution deductions if they are contractual.  If PILONS are non-contractual and are paid as compensation for loss of notice and breach of contract they are paid free of tax and national insurance.

From the 6 April 2018 however, all PILONS will be treated as taxable earnings irrespective of whether they are contractual or non-contractual

Key Points

• From 6 April 2018 it will no longer be possible to agree an early termination, forego part of the notice period and treat the equivalent of the notice pay as tax-free compensation.
• Employers must treat the proportion of a termination payment which reflects basic pay for any part of a notice period not served, as earnings which would then be subject to tax and NIC contributions.
• The new rules relate to payments made on or after 6 April 2018 even if the termination took place earlier.
• Normal termination payments will continue to benefit from the £30,000 tax exemption.

How it affects you?

Employers will need to carefully separate out the various elements of the payments made on termination of employment. HMRC will also assume that any termination pay will include PILON if the employee is not required to work their full notice. As notice pay will now always be taxable employers may have to pay more when negotiating termination settlements.

What you can do?

As there will be no longer any advantage to not having a PILON clause in contracts of employment you may wish to consider revising these to include a contractual PILON. Please contact our Chartered Accountants in Grimsby if you have any questions or require guidance on the tax aspects of these new rules.