Are you being made redundant, or are you considering making someone redundant? If the answer is yes then you will be interested in how much tax and national insurance you will be paying.
It is general knowledge, of course, that redundancy payments of up to £30,000 are tax-free They are also not liable to National Insurance. Redundancy payments above £30,000 are taxable on the excess above £30,000. However, it is less well-known that the surplus remains free of National Insurance!
However, there are some payments related to the cessation of employment where the tax treatment is less clear-cut, of which the main one is “Pay In Lieu Of Notice”(“PILON”). Under employment legislation all workers are entitled to a notice period of between 1 week and 12 weeks, depending on the length of their employment. The actual contract of employment frequently specifies a longer period, in which case this longer period takes precedence. However, when the employment ceases the employer may want that employment to cease immediately, for instance, to protect confidentiality. Under these circumstance the employer may make a PILON in respect of the notice period not worked.
A PILON can be treated under the special rules for redundancy payments provided that the right to PILON is not incorporated in the Contract of Employment. However, if there is a contractual right to PILON then the payment is subject to normal tax and national insurance. In order for PILON to be included in the £30,000 then it must be wholly non-contractual.
This can lead to confusion over the tax treatment of PILON. For a payment to be treated as taxable it is not necessary for the contract of employment to state that PILON will be paid. It has been held, for instance, that including a clause in the contract of employment such as “The company reserves the right to pay in lieu of contractual notice…” is sufficient to preclude treating it as tax-free payment. Even more worrying, an implied employment condition can be created through expectation. If an employer has a history of paying people not to work their notice then this may create a situation where is an implied condition in the contract of employment.
There is both good news and bad news from April 2018. The good news is that new regulations will end this potential confusion. The bad news is that this will be done by making all PILON subject to both tax and national insurance. At the same time, redundancy payments above £30,000 will become subject to employers national insurance, although they will still be free of employees national insurance deductions.
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