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Taxation of payments in lieu of notice

25 May 2018

From 6 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. The rules emerged from a Government consultation on the simplification of the tax treatment of termination payments which was first launched in 2012. Far from simplifying the taxation, the rules are complex and, in many cases, will increase the costs of both employers and employees.

This inbrief covers:

  • Tax position prior to 6 April 2018
  • Tax position with effect from 6 April 2018
  • What is PENP and how is it calculated?
  • What is basic pay for these purposes?
  • Which allowances are excluded from basic pay? 
  • What is the impact of the new rules on an employee’s termination payment?
  • What are the implications of the new rules? 
  • Unusual situations 

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***NOTE: We have produced a termination payments calculator to help you with the calculations described in this inbrief. It is available here. We will update this from time to time so bookmark this page to make sure you are always using the most up to date version***

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