Skip to main content

Cookies

We use cookies to help provide a better website experience for you, as well as to understand how people use our website and to provide relevant advertising.

By clicking "I agree", you'll be letting us use cookies to improve your website experience. To find out more or to change your cookie preferences, click "Manage Cookies".

We value your privacy

Like many other websites, our website uses cookies. Cookies are small files placed on your computer when you visit our site. They serve a number of purposes, including ensuring that certain parts of the website work properly, allowing us to understand which areas of our website are the most popular and allowing us to provide more relevant advertising messages. They don't allow us to identify you specifically and no personal data is gathered about you.

If you'd prefer that cookies weren't placed on your computer when you visit our site, you can use the controls below to allow or disallow different types of cookie. Some cookies are essential for the website to work, so they can't be disallowed.

  • These cookies give us anonymised information on how people use our website. We use these cookies to help us tailor our site to meet the needs of our visitors, for example by making sure our most popular pages are easy to find.

  • These cookies serve a number of purposes, such as allowing you to share our content with your friends and social networks. We also use these cookies to provide targeted advertising, so you may see relevant adverts based on the pages you look at on our website.

  • About
  • News & Insights
  • Careers
  • International
  • ESG
0370 1500 100
Dialog that contains search functionality
Irwin Mitchell Logo
  • Personal
    • Personal
    • Personal Home
    • Personal Injury Claims
      • Personal Injury Claims
      • Personal Injury Claims Home
      • Abuse & Criminal Injury Claims
      • Accidents In Public Places Claims
      • Accident At Work Claims
      • Air, Rail & Maritime Claims
      • Asbestos & Mesothelioma Claims
      • Changing Solicitors During a Personal Injury Claim
      • Group Claims
      • Holiday Accidents & Illness Claims
      • Illness Compensation Claims
      • Industrial Disease Claims
      • Injury Types
      • Military Injury Compensation Claims
      • No Win No Fee Personal Injury Claims
      • Personal Injury Claims In Scotland
      • Personal Injury Information
      • How To Claim Compensation For Personal Injury
      • Product Liability Claims
      • Rehabilitation & Medical Care
      • Road Traffic Accident Claims
      • Serious Injury Claims
      • Who Can Help?
      • Support Services
    • Medical Negligence Claims
      • Medical Negligence Claims
      • Medical Negligence Claims Home
      • Cancer Misdiagnosis Claims
      • Birth Injury Claims
      • Cauda Equina Syndrome Claims
      • Cosmetic Surgery Claims
      • Cerebral Palsy Claims
      • Defective Medical Device Claims
      • Dental Negligence Claims
      • Diabetes Claims
      • Fatal Medical Negligence Claims & Inquests
      • GP Negligence Claims
      • Hospital Negligence Claims
      • What Is Medical Negligence?
      • Meningitis Misdiagnosis Claims
      • Failure To Prevent Suicide Claims
      • Misdiagnosis Claims
      • Ophthalmic Negligence Claims
      • Pregnancy & Gynaecology Injury Claims
      • Sepsis Negligence Claims
      • Shrewsbury & Telford Hospital NHS Trust Maternity Care Claims
      • Stroke Misdiagnosis Claims
      • Surgery Compensation Claims
    • Family Law
      • Family Law
      • Family Law Home
      • Divorce Solicitors
      • Prenuptial & Postnuptial Agreement Solicitors
      • Child Abduction Solicitors
      • Civil Partnership Solicitors
      • LGBT+ Family Law Solicitors
      • Unmarried Couples' Rights
      • Divorce Financial Settlement Solicitors
      • Child Arrangement Orders
      • Family Mediation Lawyers
      • Out Of Court Divorce Solicitors
      • Separation Agreement Solicitors
      • Adoption & Surrogacy Solicitors
      • Counselling
    • Wills, Trusts & Estates
      • Wills, Trusts & Estates
      • Wills, Trusts & Estates Home
      • Estate Planning Solicitors
      • Powers Of Attorney
      • Trusts
      • Will Writing Services
      • Will Disputes & Contentious Probate
    • Conveyancing & Property Solicitors
      • Conveyancing & Property Solicitors
      • Conveyancing & Property Solicitors Home
      • Conveyancing Fees Calculator
      • Buying A Property
      • Selling A Property
      • Remortgage
      • Transfer Of Equity
      • Buy To Let
      • Absentee Landlord & Freeholder Tracing Service
      • Freehold Purchase (Leasehold Enfranchisement) Solicitors
      • Lease Extension Solicitors
      • Conveyancing Guide
      • Our Prices - Residential Conveyancing for properties valued above £500,000
    • Tax
      • Tax
      • Tax Home
      • Business Tax
      • Inheritance Tax
      • International Tax
      • Professional Negligence
      • HMRC Tax Investigations
      • Tax Disputes & Litigation
      • Tax Residence
      • Tax Returns & Compliance
      • Wealth Structuring
    • Probate
      • Probate
      • Probate Home
      • International Probate
      • Probate Sale Conveyancing
      • What Is Probate & How Does It Work?
    • Will, Trust & Estate Disputes
      • Will, Trust & Estate Disputes
      • Will, Trust & Estate Disputes Home
      • Trust Disputes
      • Inheritance Act Claims
      • Contesting A Will
      • Contentious Probate
      • Pre-Death Agreements
      • Professional Negligence
      • Challenging A Lifetime Gift
      • Financial Abuse
      • Statutory Will Disputes
      • Defending A Contested Will
    • Employment Solicitors
      • Employment Solicitors
      • Employment Solicitors Home
      • Employment Contract Solicitors
      • Employment Disputes
      • Dismissal & Redundancy Solicitors
      • Employment Discrimination Solicitors
      • Employment Lawyers for Legal Expenses Insurance
      • Harassment & Bullying At Work Solicitors
      • Parental & Family Friendly Employment Rights
      • Professional Discipline Solicitors
      • Recruitment & Promotion
      • Senior Executive Employment Lawyers
      • Settlement Agreements
      • Whistleblowing Solicitors
    • Elderly Legal Services
    • Protecting Your Rights
      • Protecting Your Rights
      • Protecting Your Rights Home
      • Actions Against The Police
      • Environmental & Planning Law
      • Assessment & Treatment Unit Solicitors
      • Data Protection Breach Claims
      • Education Law
      • Healthcare & Social Services
      • Human Rights
      • Judicial Review
      • Mental Capacity
      • Motoring Offences Legal Advice
      • Professional Regulation & Discipline
      • Dispute Resolution
      • Legal Aid
    • Immigration Solicitors
      • Immigration Solicitors
      • Immigration Solicitors Home
      • British Citizenship & Naturalisation Solicitors
      • EU & EEA Immigration Solicitors
      • Indefinite Leave To Remain Solicitors
      • Spouse Visa Solicitors
      • Innovator Visa
      • Tier 1 Entrepreneur Visa
      • Permanent Residence Solicitors
      • Tier 1 Investor Visa
      • Business Immigration Solicitors
    • Crime & Investigations
      • Crime & Investigations
      • Crime & Investigations Home
      • Crime
      • Fraud & Financial Crime
      • Court Martial Solicitors
      • Motoring Offences Legal Advice
      • Regulatory Investigations & Enforcement
    • Insolvency
      • Insolvency
      • Insolvency Home
      • Business Restructuring & Insolvency
      • Debt Consultancy
      • Insolvency Disputes & Litigation
    • Court Of Protection
      • Court Of Protection
      • Court Of Protection Home
      • Court Of Protection Deputyship
      • Personal Injury Trusts
      • Court Of Protection Problems & Disputes
      • Healthcare and Social Services
      • Frequently Asked Questions
      • Powers Of Attorney
      • Powers Of Attorney Disputes
      • Statutory Wills And Trusts
    • Agriculture & Rural Business
    • Landed Estates
    • Family Offices
  • Wealth Management
    • Wealth Management
    • Wealth Management Home
    • Asset Management For Personal Injury
    • Charity & Philanthropy
    • Estate Planning
    • Ethical & Sustainable Investing
    • Financial Planning
    • Intergenerational Wealth Management
    • Investment Management
    • Retirement Financial Planning
    • Succession Planning
    • Tax Planning
  • Business
    • Business
    • Business Home
    • Sectors
      • Sectors
      • Sectors Home
      • Agriculture & Rural Business
      • Consumer & Retail
      • Education
      • Financial & Professional Services
      • Landed Estates
      • Manufacturing
      • Media & Entertainment
      • Real Estate
      • Sport
      • Technology & Communications
    • Banking & Finance
      • Banking & Finance
      • Banking & Finance Home
      • Corporate Banking
      • Funds
      • Leveraged & Acquisition Finance
      • Real Estate Finance
      • Receivables Finance & Asset Based Lending
    • Business Crime
      • Business Crime
      • Business Crime Home
      • Anti-Bribery & Corruption
      • Asset Tracing & Recovery
      • Cartels & Illegal Price Fixing
      • Cybercrime
      • Dawn Raids
      • Deferred Prosecution Agreements
      • Extradition
      • INTERPOL Red Notices
      • Mutual Legal Assistance
      • Private Prosecution
      • Proceeds Of Crime Act
      • Unexplained Wealth Orders
      • Fraud Lawyers
      • Insider Trading & Market Abuse
      • Corporate Internal Investigations
    • Business Immigration
      • Business Immigration
      • Business Immigration Home
      • Business Visitor Visa
      • Innovator Visa
      • Prevention Of Illegal Working
      • Sole Representative Of An Overseas Business
      • Tier 1 Entrepreneur Visa
      • Tier 1 Investor Visa
      • Tier 2 & 5 Sponsor Licence
      • Tier 2 Visa
      • Tier 4 Sponsor Licence
    • Commercial
      • Commercial
      • Commercial Home
      • Commercial Contracts
      • Competition Law
      • GDPR & Data Protection
      • Information Technology
      • Media & Entertainment
      • Sourcing
      • Licensing
      • Notary Public Solicitors
    • Commercial Litigation & Dispute Resolution
      • Commercial Litigation & Dispute Resolution
      • Commercial Litigation & Dispute Resolution Home
      • Banking & Finance Litigation
      • Business Interruption Insurance Lawyers
      • Contract Disputes
      • Commercial Judicial Review
      • Defamation & Reputation Management
      • International & Cross-Border Disputes
      • Litigation Funding
      • Our Prices - Commercial Debt Recovery
      • Professional Negligence
    • Corporate
      • Corporate
      • Corporate Home
      • Corporate Advisory
      • Equity Capital Markets
      • Mergers & Acquisitions (M&A)
      • Private Equity
    • Costs Team
    • Environmental, Social & Governance
      • Environmental, Social & Governance
      • Environmental, Social & Governance Home
      • Environment
      • Social
      • Governance
      • International
      • ESG Legal Advisory Services
      • Cyber Security
      • Diversity & Inclusion
      • Legislation Library
      • ESG Media Library
      • Sports Sector
      • Manufacturing Sector
      • Real Estate Sector
      • Consumer & Retail Sector
    • Employment Law
      • Employment Law
      • Employment Law Home
      • Business Immigration
      • Employment Contracts, Policies & Procedures
      • Disciplinary & Grievance
      • Employee & Industrial Relations
      • Employment Lawyers for Legal Expenses Insurance
      • Employment Litigation & Dispute Resolution
      • Equality, Diversity & Discrimination
      • Flexible Working Arrangements
      • Health & Safety
      • HR Advice Service - IMhrplus
      • Managing Sickness Absence
      • Pensions
      • Recruitment
      • Restrictive Covenants
      • Restructuring & Redundancy
      • Self Employment, Contractors & Agency Workers
      • Employment Seminars, Training & Updates
      • TUPE
    • In-House Counsel
    • Intellectual Property
      • Intellectual Property
      • Intellectual Property Home
      • Defamation & Reputation Management
      • Copyright Lawyers
      • Design Rights Lawyers
      • Image Rights Lawyers
      • IP Audits
      • Online Marketplace Seller Account Or Listing Suspensions
      • Stopping IP Infringement By Sellers On Online Marketplaces
      • Patent Lawyers
      • Trade Mark Lawyers
      • Trade Secrets Lawyers
    • Legal Helpline
    • Pensions
      • Pensions
      • Pensions Home
      • Employment
      • Managing Death Benefit Trusts
    • Regulatory & Compliance
      • Regulatory & Compliance
      • Regulatory & Compliance Home
      • Road Transport & Operator Compliance
      • GDPR & Data Protection
      • Regulatory Investigations
      • Environment & Safety Regulatory Compliance
      • Financial Services Regulation
    • Real Estate
      • Real Estate
      • Real Estate Home
      • Corporate Occupiers
      • Real Estate Development and Regeneration
      • Construction & Engineering
      • Environmental
      • Real Estate Finance
      • Real Estate Investment
      • Later Living & Care
      • Planning
      • Property Litigation & Real Estate Disputes
      • Real Estate Tax
      • Residential Development
      • Strategic Land
      • Structured Real Estate
    • Restructuring & Insolvency
      • Restructuring & Insolvency
      • Restructuring & Insolvency Home
      • Corporate Insolvency
      • Partnership Insolvency
      • Directors' Duties
      • Restructuring Plans
      • Restructuring
    • Tax
      • Tax
      • Tax Home
      • Corporate Tax
      • Real Estate Tax
      • Tax Investigations
  • People
    • People
    • People Home
    • Search By Name
    • Search By Location
    • Search By Expertise
    • Business Management
  • Offices
    • Offices
    • Offices Home
    • Birmingham
    • Bristol
    • Cambridge
    • Cardiff
    • Chichester
    • Gatwick
    • Glasgow
    • Leeds
    • Liverpool
    • London
    • Manchester
    • Middlesbrough
    • Newbury
    • Newcastle
    • Reading
    • Sheffield
    • Southampton
  • Contact
  • About
  • News & Insights
  • Careers
  • International
  • ESG
Irwin Mitchell Logo
Dialog with Irwin Mitchell phone number
Call us on 0370 1500 100

We're here 24/7, 365 days a year.

  • Home
  • News & Insights
  • Newsletters
  • PILONs and tax – all change

PILONs and tax – all change

The tax treatment of some termination payments is changing. From 6 April 2018, new rules apply to non-contractual PILONs that are more complicated than you might expect.

Our tax expert Paul Spenceley explains the detail.

Background

Over the last couple of years, HMRC has been consulting on changes to the tax and NIC treatment of termination payments. Their view is that the current rules are unnecessarily complex and the exemptions incentivise employers to manipulate the rules by structuring arrangements to minimise the tax and NIC due.

A “termination payment” is any payment that is not already chargeable to income tax and does not include contractual payments (such as PILON, holiday pay, bonuses etc.), restrictive covenants, payments caught by the legislation covering Employer-financed retirement benefits etc. All these are taxable in full and are not eligible for consideration under the £30,000 tax exemption.

Non-contractual PILON

This area has been complicated over the years because HMRC has sought to tax contractual and discretionary PILON payments as general earnings rather than as termination payments. HMRC has also sought to tax non-contractual PILONs made to staff where this amounts to a “customary” or “automatic” response to termination as general earnings.

However, if you do not have a contractual right to make a PILON (and it is not caught by the “customary” or “automatic” provisions set out above) you will breach the employee’s contract of employment by making one. Under the existing rules, this payment will be treated as damages and will form part of the termination payment and the first £30,000 of any termination payment is usually tax-free.

Many employers do not realise that, as a damages payment, their obligation to the employee is based on what a court would award the employee if he sued for breach of contract. This is equivalent to the employee’s net rather than gross pay. HMRC are concerned that where employers are aware of this they have structured termination payments to avoid tax by, for example, treating the entire amount as an ex gratia payment.

What is changing?

Contractual PILON payments will continue to be treated as general earnings and will be taxable in full.

However, termination payments will be divided into two categories – those that benefit from the threshold (£30,000 exemption) and those that do not.

Normal termination payments will continue to benefit from the £30,000 exemption but HMRC has created a new category referred to as “post-employment notice pay” which will not, and employers will need to decide what element of the payment falls into each category.

How will post employment notice pay be calculated?

Employers will need to understand how HMRC calculate post-employment notice pay to be able to determine how the termination payment will be taxed and how much, if any, is subject to PAYE. If you fail to withhold the correct amount of PAYE, HMRC will pursue you for the under-deduction.

HMRC will assume that any termination payment will include post-employment notice pay if the employee is not required to work their full notice, either contractual or statutory (whichever is the longer). The amount of post-employment notice pay is calculated using the formula (BP x D/P) minus T. These are expressed as follows:

  • BP – Basic Pay
  • D – Length of the Post-employment notice period
  • P – number of days in the pay period used to calculate Basic Pay
  • T – The total amount of the termination payment less any amount that is already taxed as earnings, statutory redundancy pay, holiday pay for a period before the employment ends or a bonus payable for termination of the employment.

In calculating “Basic Pay” you must take the employee’s taxable employment income in the final pay period before the employment ended plus any amount that the employee had given up the right to receive (salary sacrifice) but disregarding:

  • Any amount received by way of overtime, bonus, commission, gratuity or allowance
  • Any amount received in connection with the termination of the employment
  • Any benefits in kind
  • Any amount that relates to company sick pay, restrictive undertakings and certain amounts that relate to employee shareholders
  • Any amount that relates to shares or share options

There are anti-avoidance provisions to stop employees/employers reducing the contractual notice period as part of the termination agreement.

It is possible that the above formula will result in a negative answer in which case the post-employment notice pay will be nil.

In cases where the only payment made to the employee is a non-contractual PILON it will become subject to income tax and will not benefit from the £30,000 exemption. However, if you decide to pay less PILON damages but additional termination payments (such as non-statutory redundancy pay, ex-gratia or compensation for loss of office) you will have a complex computation to make to determine what element is taxable.

When do these changes come into effect?

The new rules relate to payments* made from 6 April 2018 and have no bearing on the actual date of termination of the employment. For example, an employee whose employment terminated on 31 March 2018, but who receives their termination payment on 14 April 2018, will be fully caught by the new rules. However, an employee whose employment terminated on 1 April 2018, who received a 12 month non-contractual PILON on 3 April 2018, will not be caught by the new rules at all.

If you do not want to be caught by the new rules you must make sure you structure any new settlement agreements and make any termination payments before 6 April (even if this means they are made outside the normal payroll run). Don’t let your payroll dictate when payments are made.

*HMRC have just announced (Feb 2018) that the new rules on the taxation of non-contractual payments in lieu of notice apply to terminations after 5 April – rather than to payments made after that date. This interpretation is not set out in published legislation, but HMRC may now find it difficult to argue against its own view!

Are there any other relevant changes?

Yes. Foreign Service Relief will no longer be available on termination payments where the employee is a UK tax resident in the year their employment ends.

Under the current rules where an employee has, during the course of their employment with a particular employer, worked overseas they are able to claim a deduction in the taxation of a termination payment provided they meet one of the following conditions:

  • They have spent more than three-quarters of their period of employment working abroad, or
  • If the period of their service lasted more than 10 years, the whole of the last 10 years was spent working abroad, or
  • If the period of their service lasted more than 20 years, they had spent more than 10 years of that period working abroad, including any 10 of the last 20 years

If the employee meets any of the above conditions they qualify for a full exemption from UK tax on the payment. Where they do not meet any of the conditions it is also possible to time apportion the exemption.

It is important to understand that termination payments are classed as “specific” earnings for income tax purposes, which means that a person’s tax residence at the time of the payment does not affect the taxation of the payment. For example, if your employee has worked for you for 8 years, the first 3 years in the UK and the remainder in France, he or she will still be liable for tax on any termination payment, even though they left the UK many years ago. These rules will not change.

However, if your employee is a UK tax resident in the year their employment ends they will no longer be entitled to claim a deduction for Foreign Service relief and thus the full payment, subject to the £30,000 exemption, will be taxable in the UK. For example, if your employee has worked for you in Australia for 15 years but spends the last 2 years in the UK, if their employment ends on or before 5 April 2018 he or she will qualify for a full exemption from UK tax on the termination payment. However, it if it ended on 7 April 2018 the full amount will be taxable.

There is still an exemption for Foreign Service as a seafarer but we do not propose to cover this.

Are HMRC also making changes to NICs in April?

No. There were changes announced for NIC purposes also from 6 April 2018 but the Chancellor has decided to defer these until 6 April 2019.

Need further help?

These changes are complicated. If you fail to withhold the correct amount of PAYE, HMRC will pursue you for the under-deduction.

Please contact us on 0870 1500 100 for help and advice.

Published: 22 January 2018


Sign up to receive our monthly employment law update

January 2018

  • FAQs: Engaging and retaining EU staff post Brexit
  • Myth: We can fairly dismiss an employee returning from maternity leave if our customers prefer the temporary replacement
  • PILONs and tax – all change
  • Investigating allegations of sexual misconduct
  • Will your gender pay gap report expose your organisation to criticism?
  • Brief alerts
  • Legislation Tracker
  • On demand webinar: Impact of GDPR on HR




For general enquiries

0370 1500 100

Or we can call you back at a time of your choice

Phone lines are open 24/7, 365 days a year

Contact us today

For a free initial consultation

Freephone

0370 1500 100

Prefer not to call?

Use our form

This data will only be used by Irwin Mitchell for processing your query and for no other purpose.

About Irwin Mitchell

Founded in Sheffield in 1912, Irwin Mitchell has always been a bit different. Our advisers really get to know the people and business that we help.

It's what we call 'expert hand, human touch'.

We have offices around the UK so wherever you are, our experts can help.

Contact Us

Give us a ring to speak to a member of our team in the strictest confidence. Or you can fill out our contact form and we'll ring you back.

0370 1500 100

Our phone lines are open 24/7, 365 days a year

Get a call back

Fill in your details below and we'll be in touch as soon as possible

This data will only be used by Irwin Mitchell for processing your query and for no other purpose.

  • Contact
  • 0370 1500 100
  • Contact Irwin Mitchell
  • Social Media
  • Twitter
  • Facebook
  • YouTube
  • LinkedIn
  • Instagram
  • About Irwin Mitchell
  • About Us
  • Social Responsibility
  • Careers
  • Business Management
  • Alumni Programme
  • SRA Regulated
  • Terms & Conditions
  • Accessibility
  • Privacy & Security
  • Hoaxes
  • Modern Slavery Act Statement 2021
  • Manage Cookie Settings

© 2023  Irwin Mitchell LLP

Irwin Mitchell LLP is authorised & regulated by the Solicitors Regulation Authority. Our Regulatory Information

Dialog that contains a form to request a callback.

Request A Callback

Enter you details below and we'll call you back, at a time of your choice

Preferred date*
Today
Tomorrow

This data will only be used by Irwin Mitchell for processing your query and for no other purpose.