A Taxing Time For PILONs

As of April 2018, amendments will be introduced to Part 6, Chapter 3 of the Income Tax (Earnings and Pensions) Act 2003 ('ITEPA'), which deals with the taxation of termination payments in employment. A key change is to be made to the taxation of payments in lieu of notice (PILONs). Helen Wyatt looks as the new legislation in this KeyNote.

What is the problem with taxation of PILONs?

At present, the tax treatment of PILONs is somewhat complicated and arguably unfair. The tax position differs depending on whether the PILON is considered to be contractual or non-contractual.

1. If the employer's ability to make a PILON is a contractual right and it exercises that right in accordance with the contract, then the PILON is taxable as earnings and subject to deduction of PAYE income tax and NICs at source.