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Pay In Lieu Of Notice - how can you make it taxable?
Pay In Lieu Of Notice (PILON) is often thought to be payable without incurring a tax liability, and if paid as damages for breaching an employment contract, that can be correct.
If, as an employer, you fail to apply PAYE and NIC deductions where they should be applied, you as employer will bear the cost of the PAYE and NIC on the gross equivalent of the payment. This is between approximately 67% and 87% of the actual payment.
PILON is taxable if it is paid in respect of the employment. This will always be the case where the contract of employment gives the employee any right to PILON.
Many solicitors advise that contracts of employment should give that right. It would not normally be possible to enforce a restrictive covenant in such a contract on an employee, if the employer has already breached the contract by making a PILON outside the contract.
We cannot advise on your contracts of employment, only the tax consequence which results.
In cases of doubt, there is a clearance procedure (Non-statutory lump sum redundancy payments SP 1/94).
Tax Bulletin 63 published in February 2003 gives the Inland Revenue view of PILON following the January 2001 employment law case of Cerberus Software Ltd v Rowley (2001 IRLR 160).
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 15 February 2003.