Notice pay and tax in settlement agreements

4th April 2018

Attention to all Employers, please do not forget that taxation rules will be changing from 6th April 2018 in respect of payment in lieu of notice in relation to settlement agreements.

From 6th April 2018, all payments in lieu of notice (“PILON”) whether contractual or not is taxable and also National Insurance Contributions will be due on the amount of basic pay that the employee would have received if they had worked their notice in full.

The general rule was that if there wasn’t a contractual right to a PILON because there wasn’t an express term in the contract or an established custom or practice, then one could argue that the payment could be seen as damages for breach of contract and the first £30,000 could be paid tax free without deductions of national insurance contributions.

This change will now need to be factored into how you enter into settlement agreements in the future.

If you do not currently have a contractual PILON clause in the contract, I would suggest that you have these in your contracts of employment going forward so at least an employee cannot argue breach of contract.