PILN

[scot]

If an employee submits notice and our organisation chooses to terminate the contract earlier than the 4 week notice period specified in their contract (the employee has worked for us for just over 2 years) and they also choose to pay 12 weeks "PILN" what are the tax an NI implications. No speicifc provision exists in either the conditions of service or the employee contract entitling the emploee to PILN.

Could someone advise.

Thanks

[Nigel Lord]

scot

The contractual notice period (four weeks) will be fully taxable and should be subject to PAYE.

The additional payment may be described as an ex-gracia payment in compensation for the loss of employment, and will be subject to the £30,000 exemption.

I would caution, that many termination payments differ in their legal nature to the description applied by either the employer of employee, and advice should be sought following submission of the draft documentation. There should also be liaison between the employment law adviser and the tax adviser, to ensure that both objectives are compatible.

If you require any further assistance please do not hesitate to contact us, and we will be happy to act on your behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
102 Smarts Lane
Loughton
Essex, IG10 4BS
020 8508 1642 & 07769 931852
lordassociates@ntlworld.com

[Huw Williams]

I am not sure I agree with Nigel. PILN presumably stands for pay in lieu of notice - ie it is a form of compensation for the pay that would have been received for working out the notice period.

My understanding is that this can therefore come within the £30,000 exemption and should be NI free.

However you say they are paying 12 weeks when only 4 are due which suggests that the payment is not strictly PILN.

As Nigel says, you should check any deal before it is finalised as recent tax cases have reduced the circumstances in which the £30,000 tax exemption applies.

Huw Williams
enquiries@huwwilliams.co.uk

[Nigel Lord]

Just to clarify my answer, I understand that there is a contractual obligation to pay four week's salary. If this is the case, income tax and NIC are due. (S.19(1), ICTA '88 refers).

If the payment goes beyond this (which I assume to be the case with the additional payment) there is scope for it to be tax free if the termination agreement is appropriately worded.

I would be interested in Huw's further comments.

Nigel Lord
Lord Associates
Taxation & Business Consultants
102 Smarts Lane
Loughton
Essex, IG10 4BS
020 8508 1642 & 07769 931852
lordassociates@ntlworld.com

[Si]

My understanding is that the PILON will only be taxable if the employment contract specifically states that the employee will not be required to work their notice period.

[Nigel Lord]

I would generally agree with Simon. The treatment depends on the following circumstances:

1. Wording of the contract,

2. Agreement at time of termination,

3. Order of events.

Conclusion: take advice before taking action.

Nigel Lord

[Bridget Jones]

The position in employment law as I am aware. If the contract states that the employer can make payment is lieu of serving notice, then this is classified as an emoulemant arising out of employment and therefore taxable. However if employer chooses a notice period less than contract notice period and pays employee off, then this sum is treated as damages for the employer's breach of contract and not taxable. An employment lawyer would be able to advise you as to your poistion. It all hinges on whether is evidenced inb writing by contract, S1 ERA 1996, declation of terms of employment or other document.