Pilon

terrih

Confusion re redundancy package

Today I received a redundancy package. I have received tax free redundancy pay one week for each year's service, totalling 6 weeks' pay. This was untaxed. I also will receive notice pay entitlement of 1 week's salary for each year I have worked totalling 6 weeks pay subject to PAYE. Is this correct? Should my pay in lieu of notice be taxed like this?

Advice would be appreciated.

Thanks

Pete111

SarEl wrote: »

This isn't PILON. It is a settlement to purchase his legal right to notice. Fine but important distinction, because settlements under £30k are not tabable amounts regradless of what the contract says about PILON. It would appear the employer is clever!

Question for you Sar El. I'm often told that the HMRC are very hot on not allowing tax free PILON even where no contractual PILON clause exists if there is an established custom and practice within the firm. Is this still correct?

This cropped up the other day when I was letting a long term employee go - unlike more recent employees, their contract had no PILON provision. However, I was advised not to pay PILON tax free due to the companies more contempory stance on this even though contractually speaking the individual argued I could do so.

Could I have instead used the 'settlement to purchase his legal right to notice' argument? The total package was under 30k so would have been worth it..

jazzyman01

Terrih - notice is usually taxed and redundancy payment tax free. Outstanding holiday pay is also taxed.

The issue raised by SarEl is the fact that where payment in lieu of notice is silent, companies have been paying tax free up to the maximum of £30k. However, Pete 111 is correct as HMRC has been reviewing this closely and this is why any Compromise Agreement that I have drafted has included the statement that whilst PILON is included and is free of tax, any tax that does become due is at the cost of the employee. This has been accepted by all lawyers acting on behalf of clients and, to date, we have not had a problem at all.

SarEl

Pete111 wrote: »

Question for you Sar El. I'm often told that the HMRC are very hot on not allowing tax free PILON even where no contractual PILON clause exists if there is an established custom and practice within the firm. Is this still correct?

This cropped up the other day when I was letting a long term employee go - unlike more recent employees, their contract had no PILON provision. However, I was advised not to pay PILON tax free due to the companies more contempory stance on this even though contractually speaking the individual argued I could do so.

Could I have instead used the 'settlement to purchase his legal right to notice' argument? The total package was under 30k so would have been worth it..

Yes, HMRC are getting tighter on this and companies do have to be very careful now to tread the line. I take a different approach to compromise agreements - I never mention PILON or anything else related to salary or benefits. I simply agree a settlement figure in respect of all potential claims. In most case where the contract is silent, provided the employer is careful then HMRC still cannot touch this as a tax free allowance, but it is only a matter of time before they stop it entirely I suspect.

I should point out too that many employers do not pay PILON gross either - the pay it net, and this means that they benefit financially from it too. There is no legal requirement to pay PILON gross, so in such cases you must be very careful about what the wording of a compromise agreement because if the wording is as Jarndyce suggests, and the payment is net, then you could end up owing tax and get the lower amount.

Pete111

SarEl wrote: »

Yes, HMRC are getting tighter on this and companies do have to be very careful now to tread the line. I take a different approach to compromise agreements - I never mention PILON or anything else related to salary or benefits. I simply agree a settlement figure in respect of all potential claims. In most case where the contract is silent, provided the employer is careful then HMRC still cannot touch this as a tax free allowance, but it is only a matter of time before they stop it entirely I suspect.

I should point out too that many employers do not pay PILON gross either - the pay it net, and this means that they benefit financially from it too. There is no legal requirement to pay PILON gross, so in such cases you must be very careful about what the wording of a compromise agreement because if the wording is as Jarndyce suggests, and the payment is net, then you could end up owing tax and get the lower amount.

Cheers for that - very helpful.