Payment in lieu of notice
Payment in lieu of notice, or PILON, is often offered in compromise agreements, and is a darned good thing if you can get it. To find out whether or not you are getting a good deal overall, and whether or not your case is strong enough to warrant some initial free advice, try our Compromise Calculator.
Receiving payment in lieu of notice means that your employer pays your salary, and perhaps benefits, for your notice period, but you do not have to work during that time. ‘In lieu’ means ‘instead of’ in French . For example, if an employee has a three month notice period, the employer might suddenly announce that today is the last day of employment, but that they will be paying three months wages even though you are not coming in to work any more. You might be put on ‘garden leave’ which means that you are told not to work, but not to take another job with a competitor – so you can do your gardening if you like (hence the phrase).
Is payment in lieu of notice taxable?
Whether payment in lieu of notice is taxable or not depends on the provisions of your contract and the compromise agreement. If your contract or compromise agreement contains an obligatory payment in lieu of notice or PILON clause, then it is taxable. This is because it is a contractual benefit, rather than an ex gratia payment, and thus it is a part of your overall employment package. But this is highly unlikely.
If, however, your contract or compromise agreement has a discretionary PILON clause, or no PILON clause at all, then it is not taxable. This is because your employer is seen to be breaching your employment contact by not giving you the requisite notice pay, and therefore the payment is deemed to be an ex gratia payment. Many employers do not understand this – you can refer them to the HMRC at http://www.hmrc.gov.uk/manuals/eimanual/eim13924.htm
The problem you may well have is that your employer will still probably refuse to take a risk by paying your PILON tax-free. That’s where we come in - our experts may be able to put forward the relevant case law on your behalf to make them change their minds.
If you are receiving a payment in lieu of notice in your compromise agreement, as well as an ex gratia payment and other benefits, we will always seek to ensure that you receive the compensation in the most tax efficient way. Have a look at the testimonials to see how we helped others in your situation.
If you want to tax-free your payment in lieu of notice or if you have any other compromise agreement query, get in touch by phone on 0800 533 5134, email on info@compromiseagree.com or send a message in the box to the right.
