Changes are coming… Employers prepare!

Firstly, from 6 April 2018 all payments in lieu of notice (PILONs) will be taxed as income and so will be subject to income tax and national insurance contributions.

At present, the tax treatment of a PILON depends on how it is categorised:

• When there is an express contractual PILON provision, the payment will generally be treated as earnings and subject to tax;
• Where the contract of employment gives an employer a discretionary right to make a PILON then such payments will generally be treated as earnings and subject to tax;
• However, if there is no express PILON clause in the contract of employment and the employer has not established via custom and practice a tradition of paying staff monies in lieu of notice when they leave, then payments in lieu of notice may not be subject to tax.

This last point is the one that is changing and, with effect from 6 April 2018. All PILONs, regardless of their nature, are to be treated as earnings subject to income tax and Class 1 NICs.

When calculating termination packages, employers will have to be clear about exactly what is being paid to the employee, considering each element of the package separately, and why that payment is being made.