Personnel Today
  • Home
    • All PT content
  • Email sign-up
  • Topics
    • HR Practice
    • Employee relations
    • Learning & training
    • Pay & benefits
    • Wellbeing
    • Recruitment & retention
    • HR strategy
    • HR Tech
    • The HR profession
    • Global
    • All HR topics
  • Legal
    • Case law
    • Commentary
    • Flexible working
    • Legal timetable
    • Maternity & paternity
    • Shared parental leave
    • Redundancy
    • TUPE
    • Disciplinary and grievances
    • Employer’s guides
  • AWARDS
    • Personnel Today Awards
    • The RAD Awards
  • Jobs
    • Find a job
    • Jobs by email
    • Careers advice
    • Post a job
  • Brightmine
    • Learn more
    • Products
    • Free trial
    • Request a quote
  • Webinars
  • Advertise
  • OHW+

Personnel Today

Register
Log in
Personnel Today
  • Home
    • All PT content
  • Email sign-up
  • Topics
    • HR Practice
    • Employee relations
    • Learning & training
    • Pay & benefits
    • Wellbeing
    • Recruitment & retention
    • HR strategy
    • HR Tech
    • The HR profession
    • Global
    • All HR topics
  • Legal
    • Case law
    • Commentary
    • Flexible working
    • Legal timetable
    • Maternity & paternity
    • Shared parental leave
    • Redundancy
    • TUPE
    • Disciplinary and grievances
    • Employer’s guides
  • AWARDS
    • Personnel Today Awards
    • The RAD Awards
  • Jobs
    • Find a job
    • Jobs by email
    • Careers advice
    • Post a job
  • Brightmine
    • Learn more
    • Products
    • Free trial
    • Request a quote
  • Webinars
  • Advertise
  • OHW+

Latest NewsPayment in lieu of notice (PILON)Tax

Tax reform: Hidden traps in the changes to termination payments

by James Medhurst 6 Apr 2018
by James Medhurst 6 Apr 2018

Employers should be prepared for several tax system reforms that are due to take effect this year, including changes to the rules around payment in lieu of notice. James Medhurst, an employment lawyer at Fieldfisher, explains.

The Government is continuing to tinker with the tax system, and there are several changes in the pipeline for the next tax year and beyond.

For most employers, the most significant reform will be to payment in lieu of notice (PILON), which will bring additional complications to the calculation of termination payments.

Payment in lieu of notice

How to make a payment in lieu of notice

Where an employee resigns, can the employer pay the employee in lieu of his or her notice period?

It will be necessary to consider the new rules whenever an employee leaves without working a full notice period, whatever the reason for it. Termination payments to an employee will be deemed to include notice pay, even if there is a resignation or a gross misconduct dismissal, and parties will not be able to avoid the changes by agreeing to cut short notice.

As always, the biggest priority for employers is to liaise with accountants and payroll software providers, to ensure that the new rules are incorporated. But it will also be necessary to be aware of the key changes, check to the payroll software, and to respond to the negotiating points of employee representatives.

Historically, notice pay has been taxed differently depending on whether there is a contractual right to be paid in lieu of notice, with only the PILON specified in the contract being subject to tax.

This distinction has steadily eroded over time, and is being abolished altogether from 6 April 2018. From that date, payments in lieu of notice will be subject to income tax and national insurance, regardless of what the employee’s contract says.

Statutory formula

The new legislation creates a new type of PILON, known as post-employment notice pay (abbreviated to PENP).

This is calculated from basic pay but ignores any salary sacrifice arrangements. In rare cases, the statutory formula will give a larger amount than that derived from the PILON in the contract of employment, in which case the less risky approach is to use the PENP figure in preference to what the contract says.

Another tricky situation occurs where the employee is required to give a shorter period of notice than the employer. Unless and until HMRC guidance says otherwise, it seems that the PENP should be calculated with reference to the employer’s notice period, which could greatly increase the amount of tax to be paid.

In either of the above situations, employee representatives might well ask for more generous tax treatment on behalf of their clients, but it is advisable that these overtures are resisted. Employers bear all of the tax risk and, even with an indemnity, there is potential criminal liability if the correct deductions are not made. Breaches also increase the risk of being audited by HMRC.

Settlement agreements

If an employee is dismissed without notice for gross misconduct or resigns without giving notice, but the matter is settled, it will still be necessary to apply the PENP formula, to reflect the fact no notice period has been worked.

Tax and national insurance will have to be paid on any notice pay element of the settlement sum, before the £30,000 exemption for termination payments can be relied upon.

Because it can be a difficult calculation, it is preferable for termination payments to be processed through payroll, if at all possible. If not, the PENP formula should be applied carefully, making sure, in particular, to disregard the effect of salary sacrifice on basic pay.

Tax and national insurance will have to be paid on any notice pay element of the settlement sum, before the £30,000 exemption for termination payments can be relied upon.”

To avoid any doubt, it is advisable to include the PILON or PENP figure, as appropriate, in the settlement agreement, making it clear exactly how it has been calculated. Because there is no longer any advantage to be gained by leaving pay in lieu of notice clauses out of contracts of employment, it is a good idea going forward to incorporate carefully drafted PILONs as a matter of course.

It appears that the same considerations will arise for employment tribunal awards. Where full notice has not been paid, compensation should be processed in a similar way to settlements, ideally through payroll.

Injury to feelings payments

There are also several other changes due to take effect.

The Government has confirmed the recent decision of the tax tribunal that termination payments for injury to feelings will attract income tax (subject to the £30,000 threshold), unless the injury in question amounts to a disability.

Sign up to our weekly round-up of HR news and guidance

Receive the Personnel Today Direct e-newsletter every Wednesday

OptOut
This field is for validation purposes and should be left unchanged.

For international employers, there will be significant changes to the foreign service exemption, and foreign service relief, for termination payments. However, the changes are not as dramatic as what was originally envisaged. From 6 April 2018, employees who are not resident in the UK at the time of the termination will continue to benefit from the old rules, but employees who are resident in the UK will not, even if they have worked abroad earlier in the same employment.

The Government had also proposed national insurance changes, in which termination payments in excess of the £30,000 threshold are to become subject to employer’s contributions. It is still expected to go ahead with these changes, but they have been postponed until April 2019.

James Medhurst

James is a solicitor at Fieldfisher, specialising in employment tribunal litigation, employment tax, and the TUPE aspects of outsourcing and corporate M&A.

previous post
Employee wellbeing: Is it ever OK to show emotion at work?
next post
Gender pay gap reporting: What should employers do next?

1 comment

Miriam 11 Apr 2018 - 2:20 am

Great article! I wasn’t entirely clear on this myself until very recently. It’s also a good example of why your payroll software has to have the right combination of automation and personalization. You want to be able to avoid duplicate data entry, while still being able to respond to changes like this.

Comments are closed.

You may also like

Top 10 HR questions September 2023: the role...

3 Oct 2023

Top 10 HR questions July 2023: Strikes and...

1 Aug 2023

Termination payments: what are the tax rules?

2 Mar 2023

Top 10 HR questions September 2022: additional bank...

1 Oct 2022

Top 10 HR questions January 2022: that extra...

1 Feb 2022

Top 10 HR questions September 2021: Vaccinations and...

1 Oct 2021

Top 10 HR questions June 2021: Settled status...

1 Jul 2021

Notice periods no longer covered by furlough

13 Nov 2020

Arcadia agrees to pay furloughed staff full notice...

14 Sep 2020

Warnings issued over using furlough pay to calculate...

2 Jun 2020

  • 2025 Employee Communications Report PROMOTED | HR and leadership...Read more
  • The Majority of Employees Have Their Eyes on Their Next Move PROMOTED | A staggering 65%...Read more
  • Prioritising performance management: Strategies for success (webinar) WEBINAR | In today’s fast-paced...Read more
  • Self-Leadership: The Key to Successful Organisations PROMOTED | Eletive is helping businesses...Read more
  • Retaining Female Talent: Four Ways to Reduce Workplace Drop Out PROMOTED | International Women’s Day...Read more

Personnel Today Jobs
 

Search Jobs

PERSONNEL TODAY

About us
Contact us
Browse all HR topics
Email newsletters
Content feeds
Cookies policy
Privacy policy
Terms and conditions

JOBS

Personnel Today Jobs
Post a job
Why advertise with us?

EVENTS & PRODUCTS

The Personnel Today Awards
The RAD Awards
Employee Benefits
Forum for Expatriate Management
OHW+
Whatmedia

ADVERTISING & PR

Advertising opportunities
Features list 2025

  • Facebook
  • Twitter
  • Instagram
  • Linkedin


© 2011 - 2025 DVV Media International Ltd

Personnel Today
  • Home
    • All PT content
  • Email sign-up
  • Topics
    • HR Practice
    • Employee relations
    • Learning & training
    • Pay & benefits
    • Wellbeing
    • Recruitment & retention
    • HR strategy
    • HR Tech
    • The HR profession
    • Global
    • All HR topics
  • Legal
    • Case law
    • Commentary
    • Flexible working
    • Legal timetable
    • Maternity & paternity
    • Shared parental leave
    • Redundancy
    • TUPE
    • Disciplinary and grievances
    • Employer’s guides
  • AWARDS
    • Personnel Today Awards
    • The RAD Awards
  • Jobs
    • Find a job
    • Jobs by email
    • Careers advice
    • Post a job
  • Brightmine
    • Learn more
    • Products
    • Free trial
    • Request a quote
  • Webinars
  • Advertise
  • OHW+