Taxation of payments in lieu of notice
14 January 2020
In April 2018 new rules took effect to ensure that all payments in lieu of notice (PILONs) are subject to income tax and NICs in full. Although the rules emerged from a Government consultation on the simplification of the tax treatment of termination payments, the rules are complex and in many cases increase the costs of both employers and employees. We have updated our Inbrief “Taxation of payments in lieu of notice” to include some recent changes in HMRC practice in this area.
The rules require employers to calculate an employee’s post employment notice pay (PENP) – broadly the basic salary that the employee would have received during any unworked period of notice minus any contractual or deemed PILON – and to operate PAYE and NICs on the PENP in full.
The HMRC recently made a welcome concession relating to the calculation of the PENP where the period of unworked notice is not in a number of whole months. In this situation the legislation requires employers to calculate PENP by multiplying the employee’s basic salary by the number of calendar days in the employee’s unworked notice period and dividing it by the number of calendar days in the relevant pay period. The relevant pay period is the pay period which ends prior to the earlier of the date on which notice was given or the employment terminated. By HMRC concession, rather than using the number of calendar days in the relevant pay period, employers can use a standard 30.42 if:
- this is to the employee’s advantage;
- the relevant pay period is a month; and
- the employee’s salary is paid in 12 equal month instalments.
This is likely to be to the employee’s advantage where the relevant pay period is a month which has less than 31 days.
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For further information please contact Victoria Goode or your usual LS contact.