Beware of PILONs
The law changed on 6 April 2018 which means that employers need to be now very careful when paying employees in lieu of notice.
The law previously allowed employers to pay in lieu of notice in certain circumstances either on a net or gross basis, but not account for PAYE (below £30,000).
In brief, previously the position was as follows:
- If there was a pay in lieu of notice (PILON) clause in an employee’s contract of employment, the employer had no choice but to account for PAYE on that payment;
- If there was no contractual PILON clause, but the employer had a custom and practice of paying in lieu, it would still have to account for PAYE;
- If there was no PILON clause and no such practice, it did not have to account for PAYE on the payment, and it would fall within the ex-gratia provisions which meant that the first £30,000 could be tax free (calculated in conjunction though with other payments such as redundancy pay).
From 6 April, all PILON payments have to be subject to PAYE.
There are somewhat complicated rules governing how to calculate such payments (they are called PENPs (Post Employment Notice Payments)).
In short (and this is very much an abridged version of some complicated rules) if your employee has a notice period expressed in months, and the whole of the notice period is being paid in lieu, you can determine the PILON payment by dividing their basic salary by 12 and multiplying it by the number of months’ notice.
However, if the employee has a notice period expressed in weeks, then you will need to undertake a more complicated assessment to determine the correct amount of the PILON payment.
The amount of the PILON payment will vary depending upon when the date of termination falls, so it is not as simple as just dividing annual salary by 12/52 and multiplying by the given number of months/weeks.
Furthermore, it is more complicated where an employee has variable pay and salary sacrifice schemes have to be ignored.
The new regime doesn’t appear to have had much publicity and employers can easily get caught out.
There is guidance from HMRC https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13876 or employers can take advice from their solicitors or accountants.
James Kidd, IoD Norfolk Ambassador for HR
Partner and employment lawyer, Mills & Reeve LLP