Pay In Lieu Of Notice - Taxed or not

[Wing Commander]

Hi all,

I was made redundant a couple of weeks ago and have got around to sorting a few things out. As it turns out, my PILON has been taxed. (My redundancy pay and paid holidays have also been taxed but, as I understand it, this is the way it should be)

I have done some digging and have found this:

http://www.hmrc.gov.uk/bulletins/tb24.htm

What it seems to suggest is this:

If the company puts in my contract that I will get PILON and will not work my notice, the PILON is taxed as it is just a part of my contractual pay.

If the company make no mention of PILON or not working my contractual notice period, the company are seen to be in breach of contract if they send me home the same day as telling me I am redundant. I am not being allowed to work my notice. As a result, the PILON is now seen as severance pay and is therefore not taxable.

Please can someone who knows more about this guide me before I call up HR tomorrow for a chat. I want to know the facts before I go in head first.

Thanks

Edited by Wing Commander on Tuesday 6th April 20:40

[shirt]

redundancy pay (upto 30k iirc) is not liable for taxation.

pilon IS taxable.I owed holidays but would imagine these would also be taxable.

[stemll]

PILON taxable under Section 19 ICTA 1988 (from the link you posted)

HMRC said:

Sometimes a payment is described as "in lieu of notice" where notice is in fact given but not worked -- this is sometimes called gardening leave. In such circumstances the employee is employed until the end of the notice period but is not required to provide services during that period. Gardening leave payments are payments of emoluments from the employment and are taxable as such under Section 19 ICTA 1988

Holiday pay should normally be taxed http://www.hmrc.gov.uk/manuals/nimmanual/NIM09170.....

Redundancy up to £30k is not taxed http://www.hmrc.gov.uk/manuals/eimanual/EIM13760.h....

[honest_delboy]

I've done it (twice), say you worked for your company 5 years and they give you 1wk per year, then 3 months PILON and you holidays bens etc.

5weeks pay No Tax (up to 30k?)
PILON taxed
Holiday and bens taxed

I'm sure someone cleverererer than me will be along in a second.

[Wing Commander]

Sorry, I meant to say that my redundancy pay was not taxed or NI'd. My holiday pay, my PILON pay has been.

[Wing Commander]

stemll said:

PILON taxable under Section 19 ICTA 1988 (from the link you posted)

HMRC said:

Sometimes a payment is described as "in lieu of notice" where notice is in fact given but not worked -- this is sometimes called gardening leave. In such circumstances the employee is employed until the end of the notice period but is not required to provide services during that period. Gardening leave payments are payments of emoluments from the employment and are taxable as such under Section 19 ICTA 1988

Holiday pay should normally be taxed http://www.hmrc.gov.uk/manuals/nimmanual/NIM09170.....

Redundancy up to £30k is not taxed http://www.hmrc.gov.uk/manuals/eimanual/EIM13760.h....

Ahh yes, but gardening leave implies that I am still employed by the company for the notice period. My last day of employment was the day that I was told I was redundant. In essence, my contract was breached by the company, hence my wondering if the pay turns into severence pay...

[stemll]

It then depends on what your contract says about PILON and what your termination letter gives as your end date?

If your contract says (anywhere, in any way shape or form) that you may be paid in lieu then it's taxable as it's not a breach.

If it's not mentioned then it's not taxable unless your end date is given as the end of the notice period, just that they don't want you in the building. This is because you are still employed to the end of your notice and they could, theoretically, ask you to go back in.

I should just say that I'm not saying this in any professional capacity, just that we went through this with the wife in December about taxation of PILON and holiday (plus how to calculate accrued holiday) based on what end date they give. Meant that we kept the co car for another month.

[Wing Commander]

stemll said:

It then depends on what your contract says about PILON and what your termination letter gives as your end date?

If your contract says (anywhere, in any way shape or form) that you may be paid in lieu then it's taxable as it's not a breach.

If it's not mentioned then it's not taxable unless your end date is given as the end of the notice period, just that they don't want you in the building. This is because you are still employed to the end of your notice and they could, theoretically, ask you to go back in.

I should just say that I'm not saying this in any professional capacity, just that we went through this with the wife in December about taxation of PILON and holiday (plus how to calculate accrued holiday) based on what end date they give. Meant that we kept the co car for another month.

My contract says nothing at all about PILON. It mentions nothing about being paid in lieu, in any way.

My termination letter states my last day of employment as the day that I was told about the redundancy, the 26th March.

Your input is very much appreciated!

[Wing Commander]

Wing Commander said:

stemll said:

It then depends on what your contract says about PILON and what your termination letter gives as your end date?

If your contract says (anywhere, in any way shape or form) that you may be paid in lieu then it's taxable as it's not a breach.

If it's not mentioned then it's not taxable unless your end date is given as the end of the notice period, just that they don't want you in the building. This is because you are still employed to the end of your notice and they could, theoretically, ask you to go back in.

I should just say that I'm not saying this in any professional capacity, just that we went through this with the wife in December about taxation of PILON and holiday (plus how to calculate accrued holiday) based on what end date they give. Meant that we kept the co car for another month.

My contract says nothing at all about PILON. It mentions nothing about being paid in lieu, in any way.

My termination letter states my last day of employment as the day that I was told about the redundancy, the 26th March.

I will give them a call tomorrow and see what they say. If they play ball, great. If they don't, I will do some more digging.

Your input is very much appreciated!

[shirt]

Wing Commander said:

stemll said:

It then depends on what your contract says about PILON and what your termination letter gives as your end date?

If your contract says (anywhere, in any way shape or form) that you may be paid in lieu then it's taxable as it's not a breach.

If it's not mentioned then it's not taxable unless your end date is given as the end of the notice period, just that they don't want you in the building. This is because you are still employed to the end of your notice and they could, theoretically, ask you to go back in.

I should just say that I'm not saying this in any professional capacity, just that we went through this with the wife in December about taxation of PILON and holiday (plus how to calculate accrued holiday) based on what end date they give. Meant that we kept the co car for another month.

My contract says nothing at all about PILON. It mentions nothing about being paid in lieu, in any way.

My termination letter states my last day of employment as the day that I was told about the redundancy, the 26th March.

Your input is very much appreciated!

I took voluntary redundancy and signed an agreement saying 23rd dec. would be my last day with 3 mths notice. I had the option of either:

working my notice & being paid/taxed as normal
not working it and taking pilon, but technically still under contract for 3 mths
waiving both the notice period and pilon

I chose no.2 and was paid for the 3mths minus taxes and holidays I owed,plus untaxed severance pay.

I expect you are under the same kind of situation but it hasn't been explained properly (quelle surprise).

[stemll]

Sounds as though it's not taxable as an emolument

HMRC in OP's original link said:

Where contractual arrangements do not provide for a PILON and there is no other agreement of the sort mentioned in the previous paragraph, failure to give due notice is a breach of contract by the employer. A payment made for such a breach represents liquidated damages and is not an emolument from the employment within Section 19 ICTA 1988. As a payment in connection with the termination of the employment, it is chargeable under Section 148 ICTA 1988 subject to the exemptions and reliefs in Section 188 ICTA 1988

I think the last sentence means that your PILON is added to your reduncancy payment when determining tax liability. If total is under £30k then not taxable.

Best bet is to ask them to explain why they believe that it is taxable. If you disagree based on what you can find on the HMRC website and in your contract then explain that to them. If no joy, speak to either the CAB or to HMRC or both.

Best of luck

Edited by stemll on Tuesday 6th April 22:23

[stemll]

shirt said:

Wing Commander said:

My contract says nothing at all about PILON. It mentions nothing about being paid in lieu, in any way.

My termination letter states my last day of employment as the day that I was told about the redundancy, the 26th March.

I took voluntary redundancy and signed an agreement saying 23rd dec. would be my last day with 3 mths notice. I had the option of either:

working my notice & being paid/taxed as normal
not working it and taking pilon, but technically still under contract for 3 mths
waiving both the notice period and pilon

I chose no.2 and was paid for the 3mths minus taxes and holidays I owed,plus untaxed severance pay.

I expect you are under the same kind of situation but it hasn't been explained properly (quelle surprise).

Don't believe so as last day of employment on the OP's letter of termination did not include the notice period whereas yours did. That is the key difference. They have not given notice and the contract does not allow them to make a PILON and so they are in breach (although they probably don't realise this). Hence, it's not an emolument and not taxable as such.

In your case they could, in theory, have asked you to go back in at any time during those 3 months as you are still their employee.

Edited by stemll on Tuesday 6th April 22:28

[shirt]

I'd still put good odds on it being the same circumstances as mine,but with a piss poor hr department not explaining it thoroughly.

[Eric Mc]

shirt said:

redundancy pay (upto 30k iirc) is not liable for taxation.

pilon IS taxable.I owed holidays but would imagine these would also be taxable.

Absolutely not.

"Ex Gratia" payments of up to £30,000 are paid free of tax. "Ex Gratia" does not equate to "redundancy pay".

Any emoluments paid as part of the normal employee/employer mutual obligation arangements is fully taxable and subject to NI. That includes Pay in Lieu of Notice (i.e. it is just "normal" wages).

[Wing Commander]

Eric Mc said:

shirt said:

redundancy pay (upto 30k iirc) is not liable for taxation.

pilon IS taxable.I owed holidays but would imagine these would also be taxable.

Absolutely not.

"Ex Gratia" payments of up to £30,000 are paid free of tax. "Ex Gratia" does not equate to "redundancy pay".

Any emoluments paid as part of the normal employee/employer mutual obligation arangements is fully taxable and subject to NI. That includes Pay in Lieu of Notice (i.e. it is just "normal" wages).

Hi Eric,

I was secretly hoping you would pop along! (that is not to say I do not appreciate everyone else's input! I'll stop digging now...)

So, from what you are saying, if it is not mentioned anywhere in my contract about PILONs (so no employee/employer arrangements on this), and my contract says that I have 4 weeks notice which the company breached, the PILON I have received should not be taxed?

Thanks in advance

[DavesFlaps]

How long have you worked for the company?

Depending on length of service, you may be entitled to more than 4 weeks notice, regardless of what your contract states.

[Wing Commander]

DavesFlaps said:

How long have you worked for the company?

Depending on length of service, you may be entitled to more than 4 weeks notice, regardless of what your contract states.

Worked there for 2 years, 3 months.

[DavesFlaps]

Oh well, 4 weeks then.

Best of luck with all the st.

Happened to me last year so have every sympathy.

[Wing Commander]

Thanks!

[Eric Mc]

Wing Commander said:

Eric Mc said:

shirt said:

redundancy pay (upto 30k iirc) is not liable for taxation.

pilon IS taxable.I owed holidays but would imagine these would also be taxable.

Absolutely not.

"Ex Gratia" payments of up to £30,000 are paid free of tax. "Ex Gratia" does not equate to "redundancy pay".

Any emoluments paid as part of the normal employee/employer mutual obligation arangements is fully taxable and subject to NI. That includes Pay in Lieu of Notice (i.e. it is just "normal" wages).

Hi Eric,

I was secretly hoping you would pop along! (that is not to say I do not appreciate everyone else's input! I'll stop digging now...)

So, from what you are saying, if it is not mentioned anywhere in my contract about PILONs (so no employee/employer arrangements on this), and my contract says that I have 4 weeks notice which the company breached, the PILON I have received should not be taxed?

Thanks in advance

As long as there is no indication that the payment you received was linked to your employment agreement or calculated in such a way that it could be construed as being connected to PILON, then you have a better chance of having the amount paid to you free of tax.

The legislation allows "Ex Gratia" payments up to £30,000 to be paid tax free. "Ex Gratia" means that the employer gave the money to you out of "the goodness of their hearts" and there was no pre-aranged obligation to pay this money to you.
Getting the employer to draft a letter to you stating this would be a very good idea.