Need to calculate how EXACTLY to pay this settlement agreement payment PILON etc

Brian_Pamo

Hi all

Am a new user here. I work in admin for a very small company that serves the community well whilst making a modest profit and keeping 5 employees in a job. All is good except for one issue that has the team here a little confused. Now, we can find the correct answer to this quandary by consulting our solicitors AGAIN but this will incur further legal charges. It should be noted that what I am about to write has already been settled between the employer (us), the employee and solicitors for both sides. Therefore, I am not asking for legal advice. A settlement agreement has been signed by both parties.

So, the story goes that an employee of the company did something wrong and against company rules. Whilst it wasn't actually life and death an issue of trust broke down between the employer (us) and the employee. Whilst the employee admitted the breach his advisors told him that there wasn't sufficient grounds for the company to dismiss him. So, a few months on and the employer and the employee have tried to patch up the situation but that barrier of trust is no longer there (both ways). It is important that I point out here that we are not trying to apportion blame here. That has all been sorted through solicitors. So, after involving ACAS on both sides it was decided by both parties that the best way forward was for the employee to leave his employment via a settlement agreement. Please allow me to say BOTH PARTIES WERE IN AGREEMENT ON A SETTLEMENT AGREEMENT AND IT IS ALL NOW AGREED AND SIGNED. So, under the guidance of ACAS the settlement agreement was agreed. The employer (us) then had to enlist a solicitor on board as did the employee. This is what happened. After a lot of backward and forwarding the settlement agreement was agreed between both parties through their solicitors. Once all was signed on both sides the payment agreement was finally issued. However, the wording of the agreement (regarding payment) is baffling us so we asked our solicitors to advise us how exactly to make the payment. Please take into account that this is not simply a case of company x paying employee z a set amount. There are some factors and variables to include because part of the payment is tax free. So, we contacted our solicitors and asked them how to split the payment and we were astounded that they requested a further £300 for this final bit of advice. Again, please allow me to say...I am not looking for legal advice here. I am also not complaining about this extra £300 (on top of what we've already paid them to have the agreement drawn up). With this being a money saving site I am simply asking people (who are familiar with this field) how to spilt the actual payment up with regards to Tax/Ni and other payments. So, for all you guys who have done this before here is what the legal agreement says...

2.4 The Employer shall make a payment to the Employee in respect of 5.5 days' outstanding holiday amounting to £396, up to and including the Termination Date less any days taken between the date of this agreement and the Termination Date.

2.5 The Employer shall make a payment to the Employee in lieu of his notice entitlement under clause 4.3 of his!employment!contract in the amount of £720 (the PILON). The parties agree that the amount of the PILON is equal to or exceeds the amount given by the formula in section 402D(1) of ITEPA and, accordingly, believe that the Employee's Post-Employment!Notice Pay is nil.

2.6 The payments and benefits in this clause 2 shall be subject to the income tax and National Insurance contributions that the Employer is obliged by law to pay or deduct.

3. Termination payment

3.1 Subject to and conditional on the Employee complying with the terms of this agreement, the Employer shall pay to the Employee an ex-gratia payment of £1604.00 (Termination Payment), which shall be made within 14 days of the Termination Date or receipt by the Employer of a copy of this agreement signed by the Employee and a letter from the Adviser as set out in Schedule 2, whichever is later. The Employee is obliged to take reasonable steps to mitigate his loss during this period.

3.2 The Employer will pay the Termination Payment less all required deductions for tax and National Insurance contributions. In this regard, the Company and the Employee believe the following to be!correct:

(a) The first £720 of the Termination Payment is Post-Employment Notice Pay and is taxable as earnings. The Company shall accordingly deduct income tax and employee National Insurance contributions from it at the appropriate rate.

(b) The balance of £884.00 of the Termination Payment will be tax free, as a termination award under the threshold within the meaning of sections 402A(1) and 403 of ITEPA.

3.3 The Employee shall be responsible for any further tax and employee's National Insurance contributions due in respect of the Termination Payment and shall indemnify the Company in respect of such liability in accordance with Clause 7.1.

So, for obvious reasons I have had to take out some confidential wording that could identify the employee or employer. So, we have a simple couple of questions...

1. What is the exact figure we enter into our SAGE Payroll program (which will automatically calculate the TAX & NI?) For example let's call this figure A

2. What is the exact amount we need to pay the employee (tax free). For example Let's call this figure B.

3. So, the figure we hand over to the employee is Figure A (Which has had Tax/NI deducted by our SAGE payroll program) plus Figure B.

Thank you all in advance.

PS, The fees for the employees solicitor (which we had to pay for) is billed as £350 + VAT and will be billed totally separately to this agreement.

silvercar

Welconme to the MSE forum.

The best place for your post would be the cutting tax board that can be found here:

https://forums.moneysavingexpert.com/forumdisplay.php?f=22

Many tax experts hang out over there.

getmore4less

Why is the £720 mentioned in both PILON payment and compensation payment

They should be totally seperate by having PILON included in the compensation that just confuses the situation.

PILON and holiday pay is taxable that's what goes in the payroll.

Ex gratia is not, payroll should be able to handle that as well.

How many days a week do they work if 5 the holiday pay and notice don't match unless unusual notice period.

Just read it again that agreement has conflicting clauses how did anyone agree to this?

2.5 and 3.2a

Brian_Pamo

Am confused...

ACAS and 2 sets of solicitors agreed to this.

getmore4less

The employer(you) should have made sure they understood what it means.


What gross figure are you expecting to pay?

What gross figure is the employee expecting?

if they match then you are probably OK
You just need to tax/NI the amount related to contractual payments.

It is not clear to me why the £720(which appears to relate to contractual pay) is mentioned in the ex gratia payment section at all.

Go back and ask ACAS and the solicitors they should tell you for free.

Savvy_Sue

So you don't have a payroll specialist you can consult?

Brynsam

Brian_Pamo wrote: »

Am confused...

ACAS and 2 sets of solicitors agreed to this.

In that case any of them should be able to explain how to implement it - but the drafting looks pretty ghastly, so make sure you understand any 'explanation'.

getmore4less

Savvy_Sue wrote: »

So you don't have a payroll specialist you can consult?

It's not a payroll problem yet.

It needs clarifying what the payments are supposed to be first, then it becomes obvious which bits need to pay TAX and NI.

the agreement says

accordingly, believe that the Employee's Post-Employment!Notice Pay is nil.

and

The first £720 of the Termination Payment is Post-Employment Notice Pay

Simplest solution is put the £720+holiday pay through payroll and give them £1604 tax free as the ex gratia.


What they might mean is the exgratia is only £884 and the two £720s are the same payment.

Thats why I asked earlier...

What gross figure are you expecting to pay?
What gross figure is the employee expecting?

if those numbers match then it is obvious which bit is tax/NI and which bit is tax free.

Brian_Pamo

To user Getmore4less, thank you for your in depth answers (and also to all others who have taken the time to respond). For those who say ask the solicitors or ACAS it’s not that simple.

1. I did ask ACAS and they said they can’t comment on a specific agreement that has already been agreed/amended/agreed etc.

2.I asked the other party solicitors how they expected the payments to be made. They replied that they couldn’t assist me because it would be a conflict of interest etc and that I should consult my own solicitors.

3. I consulted my own solicitors but instead of simply answering my question they want to charge me lots more money.

This is a tiny company so the sole lady who
Does payroll has no idea what to do as this has never occurred previously.

I will try and explain how the supposed figures were arrived at in some sort of timeline. Hopefully that may help.

1. After initial disagreement it was decided on a settlement agreement. So, the employee contacted ACAS as did us (the employer). Now, taking into account the employee had only been with the company 30 months ACAS suggested the actual amount of the settlement payoff should be very similar to what a redundancy pay settlement would have been. So, we calculated his redundancy pay (what it would have been in the instance of redundancy), then added in his untaken holidays. Those figures amounted to around £1700. - £1800. The employee put this figure to ACAS and the employee returned a Week later saying “ACAS said that given the circumstances it would be nice to also offer an ex gratia payment”. This is the first time we had ever heard the term ‘Ex Gratia’. Our solicitor then said ‘OK. In the interest of trying to resolve this ASAP offer them a few quid on top and round it all up to £2K”. So, that’s what happened and that’s what was agreed. So, to those trying to help here that is the overall figure (£2,000) that was initially agreed on. I repeat, the £2k was a total of:
1. Payment similar to what redundancy would have been.
PLUS
2. Untaken holidays.
PLUS
3. ‘A few quid on top’ to round it up.

So, as it stands we are expecting to write a cheque for £2,000. Now, if it was all going to the employee that would be fine. However, part of this money is TAX/NI deductible and part of it is not.

Hope that helps.

Thanks again.

getmore4less

OK so gross is expected to be £2k,

So, we calculated his redundancy pay (what it would have been in the instance of redundancy), then added in his untaken holidays. Those figures amounted to around £1700. - £1800

For 30 months service Redundancy payment would be that would be between 1 week and 3 weeks depending on age

typically 2 weeks(1 week per full year)

So, to those trying to help here that is the overall figure (£2,000) that was initially agreed on. I repeat, the £2k was a total of:
1. Payment similar to what redundancy would have been.
PLUS
2. Untaken holidays.
PLUS
3. ‘A few quid on top’ to round it up.

Where does the PILON payment come into this?

Is this notice pay on top of the £2k total for 1+2+3. or included in 1?

To account for the notice pay you say that will be in the form of a PILON payment of £720
Is that for 2 weeks notice or do they have longer contractual notice.

Then you have accrued unused holiday you say 5.5 days £396.

Assuming 5 day week we have a daily rate of £72 based on 2 weeks notice and the holiday pay

The £2k breaks down as follows

1.£720 2 weeks notice(taxable through payroll)
2.£395 5.5 days holiday(taxable through payroll)
3 £720 2 weeks redundancy(tax free)
4 £265 go away quietly money(tax free)


There are ways to make your £2k outlay give the employee more in their pocket by reducing the tax/NI but if the employee did not spot those not worth helping.

Brian_Pamo

Getmore4less

Thank you for your in depth assistance on this. One final thing... Those figures you gave add up to £2,100 as opposed to the £2,000 we agreed. Please would you be kind enough to recalc?

Regards