Changes to Payment in Lieu of Notice Rules

24 Apr

Termination payments to an employee

From April 6th 2018, termination payments in lieu of notice (PILON) is now subject to income tax and national insurance deductions.

It is no longer dependent on whether there is a ‘payment in lieu of notice’ clause in the contract. This is a change in the rules contained in the Finance (No. 2) Act 2017

In practice, employers will be required to split the termination award.  Where it is contained within a settlement agreement the amount is treated as earnings (e.g. a notice payment) will need to be set out separately from the amount benefiting from the £30,000 exemption, which relates to compensation to settle a potential or actual claim.


In the past, where a Contract of Employment did not contain a ‘payment in lieu of notice’ clause then in some circumstances an employer could make a notice payment without deduction of tax and national insurance.

Tax Status

The risk of failing to separate the individual components of any termination payment in a settlement agreement is that HMRC can question the tax status of the payment and where an attempt is made to make the whole payment tax free, it can subsequently decide that part (or whole) of the payment was indeed taxable as earnings.

Employment Law Advice

Advice should always be sought when negotiating a settlement agreement to ensure that any offer cannot be referred to in future court proceedings and to ensure that the settlement agreement wording complies with the legislation and that it is legally binding.

If you have any queries or require further information, please contact our employment experts at

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