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Taxation of Notice Pay after 6th April 2018

22 March 2018 Latest

From 6th April 2018, new rules on the taxation of termination payments come into force pursuant to changes to the Income Tax (Earnings and Pensions) Act ITEPA 2003. All payments in lieu of notice (PILONS) will be both taxable and subject to Class 1 NICs.

Current position

Currently, if there is no provision in an employment contract that provides for a PILON an employer has the option to pay any payment in lieu of notice gross.

This is in contrast to situations where there is an express right to make a PILON in an employment contract or a discretion to do so. Such a payment will be taxable and subject to national insurance contributions.

New Rules

From 6th April 2018 all payments in lieu of notice will be taxable and subject to NI and the employer will be deemed to have made a PILON, even where there is no PILON clause in the contract, in respect of basic pay paid for unworked notice.  Any pay and benefits over and above basic pay for the notice period can still benefit from the annual £30,000 exemption to tax on termination payments.

Payments made before 6th April 2018 continue to be taxed as currently and benefit from the £30,000 annual exemption if they are non contractual.

There is currently some confusion about how the new rules will apply initially.  It had been thought that if termination of employment happens before 6th April 2018 and pay in lieu of notice is made after that date that the new regime would apply.  However, HMRC has said that the critical date is termination of employment.  This is confusing as it is at odds with the legislation.  The general consensus of opinion at present is therefore to make any PILONS that are contemplated in the near future before 6th April 2018, where possible, in which case the existing rules will apply.


We recommend that contracts of employment are amended to include a PILON clause (if they do not already) as this may avoid the need to carry out a new statutory calculation which will otherwise apply where a payment in lieu of notice is made after 6th April.

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