Pay In Lieu of Notice
When you end an employee’s employment you do not have an automatic right to tell them to leave straight away and that they’ll be paid for their notice period. Pay in lieu of notice (PILON) is only legal if it is specifically provided for in the contract of employment.
If you are negotiating an exit it can be a useful to offer someone who does not have PILON provision in their contract the option to leave earlier on full pay since settlement agreements must always offer something of benefit that goes beyond existing contractual provisions if they are to protect the employer from an unfair dismissal claim. Until now PILON, that was negotiated, not contractual, was regarded as “damages” for loss of notice and breach of contract and as such it was not subject to PAYE or NICs deductions. From 6 April 2018, however, HMRC has decided this shall be changed. If an employee is leaving on or after this date and is receiving PILON the deductions must be made whether the PILON was contractual or negotiated.
Normal termination payments (resulting from redundancy or a settlement agreement) up to £30,000 will continue to be tax exempt but PILON is another element that employers (along with holiday pay) that employers will need to carefully separate out when making payments when employment ends.