Redundancy Calculation - Pay in lieu

Pigpen

Could somone clarify something for me

My brother is being made redundant - He is being paid 7.5 weeks redundancy pay (5 X 1.5 weeks) and 5 weeks notice pay - Pay in lieu of notice

I believe that his PILON is not taxable because the company are breaching the terms of his contract by not allowing him 5 weeks notice as they wish him to leave immediately. The PILON (which is taxable if written into your contract) then becomes a compensation payment and as such is not taxable?

Our own Employment advice firm confirm this but how can he get his employer to recognise this as legitimate.

Any advice or alternative views welcomed? I have trawled various web sites and they are all a bit confusing

Thanks

Pigpen

To clarify there is nothing in his contract about PILON - Therefore he has never agreed to accept a PILON

Bloater

Pilon

Is taxable.

As he is entitled to x weeks notice and they are paying him the amount instead of actually having him work the notice, they are effectively fulfilling their side of the contract and the PILON will be deemed to be a contractual payment and therefore falls within PAYE when it is paid.

The redundancy element will be tax free (up to £30,000) as this is non-contractual compensation for loss of office.

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Hope this clarifies.

Pigpen

Not sure its as straight forward as that

They basicallywant him to revoke his write to formal notice and all the benefits attributed to that - He instantly loses his company car private health care and pension contributions - His effective leave date is instant. This is the argument for the payment being compensation - He has no mention of PILON in his contract and so has never agreed that the company can pay him off in this way

The other alternative, which he has not been offered, is "gardening leave" which means he keeps his benefits for the 5 weeks and his effective leave date becomes middle October - They don't want to do this. BTW he would be entitled to the new rate Redundacy pay (£380 pw) if his leave date changes to Oct and probably one or two more days holiday pay.

Very confusing

deanshepherd

I'm with bloater.

There does not have to be any mention of a PILON in his contract, just a prescribed notice period.

Pigpen

From an employment lawyer website - see below

“””Where there is no provision in the employment contract to make a payment in lieu of notice a payment made in lieu of notice as compensation or damages for breach of the contract of employment will not be taxable as long as it is less than £30,000. This decision is of great significance when negotiating termination packages and will mean that employees who have pay in lieu of notice clauses in their contracts will need to be advised of their tax liability as will the employers concerned.”””

Its seems its all about whether the company have breached his contract and it seems if they haven't expressed in the contract that they will pay - PILON - They have to make the payment as a compensation or damages payment - I think it all revolves around the effective date of leaving/dismissal - They are supposed to give him 5 weeks notice but they want him to waive that right

Pigpen

Well this is from the Direct Gov site - So it appears it is not taxable as it is not on his contract

Extract from Direct Gov.uk – Link attached below

Is your notice pay taxable?

If you work your notice, you will be taxed at the usual rate on the money you earn in your notice period.

If your employer offers you a payment instead of you working your notice this is called 'PILON' or 'payment in lieu of notice'. PILON is only taxable if your employment contract says it is, or it is normal practice in your workplace. Otherwise, it is not taxable.

If the PILON, together with redundancy and other compensation, adds up to more than £30,000, anything over the £30,000 is taxable at the usual rate

http://www.direct.gov.uk/en/Employment/RedundancyAndLeavingYourJob/Resigningorretiring/DG_10026689

Hasan.Ahmet

Strange but true!.
If the pay is for garden leave. ie The employer say "We're paying you for the notice period but we do not require you to work" and your official termination date on the P45 is the date after the garden leave ends then it is taxable.
If the termination date is immediate and that is the date on the P45 then it is not taxable. The employer's saying "we're paying you instead of giving you notice".

deanshepherd

Be careful..

A contractual notice period will often imply (rather than explicitly state) that an employer can make payment in lieu of that notice period, rather than have the employee work. That may even be implied by habitual practice of the employer and not mentioned in the contract at all. Thus the payment may be contractual and not damages for breach.

See EMI Group Electronics Limited v Coldicott [1997].

Hasan.Ahmet

Be careful.. goes without saying.
Specific details of different cases may be different.
The rules mentioned in the earlier statement is applicable in generality.

slackda

Went througha similar thing recnetly with my company, when i checked with a employment solicitor i was told that the PILON would be taxable regardless of my leaving date of the company.

Hasan.Ahmet

Don't know the specifics of your case but in general terms your employment solicitor would be wrong.

slackda

i had to sign a compromise agreement with basically overrid the normal T&C's , PIG PEN get your brother to check if this is on the cards.

oakley

We have had several redundancy programmes over the last six years and in every case PILON is not taxable, their has been a period of consultation, then employees are told if their job is at risk, then its is confirmed and they are given a leave date, at that date they are paid their contractual notice (PILON) and any redundancy due

deanshepherd

The fact that you "have had several redundancy programmes over the last six years" with PILONs payable in every case would suggest to me that an entitlement to a PILON has become a habitually implied contract term and thus taxable.

Like any tax case, just because HMRC have not chosen to investigate does not mean that your position is correct.

When I come across a contentious area such as this I like to compile a list of tax cases that have been awarded in favour of the taxpayer and keep them handy in case an inspector calls. You may struggle to find many PILON cases won by the taxpayer but I am sure there are a few.

slackda

Im with dean on this one.

looking at it logically from the tax mans point of view, a PILON will nearly always be Taxable, as techincally it doesn't serve as part of the redundancy package, you would be entitled to a PILON if you left and were asked not to work your leave, for arguements sake you had a disagreement in the office with some one and it was negotiated that you woudln't work your notice.


Thats my thoughts at least...

Monsoon

slackda wrote: »

Im with dean on this one.

looking at it logically from the tax mans point of view, a PILON will nearly always be Taxable, as techincally it doesn't serve as part of the redundancy package, you would be entitled to a PILON if you left and were asked not to work your leave, for arguements sake you had a disagreement in the office with some one and it was negotiated that you woudln't work your notice.


Thats my thoughts at least...

Last one I processed was a standard setup and a taxable PILON. Seemed the logical thing to do.
If anyone can quote chapter and verse of advice to the contrary I'll have a looksee though.

NeilH

Hi

I had a PILON several months ago, in addition to redundancy pay, and came he conclusion that it was taxable. I "revisted" this in light of this new thread and found this:

if the employer offers a PILON in advance of the termination and the employee agrees, then the Courts have held that this represents a variation in contract and again, the payment will be taxable (SCA Packaging v HMRC) http://www.croner.co.uk/Croner/Factsheets/tax/701-3_TaxationofPaymentsinLieuofNotice.pdf?linkName=CCtax_taxationofpayments&'%2BcronerSession,'survey')

So it would seem that if you accept the PILON and leave date, it becomes contractual, thefore a taxable PILON.

Neil

deanshepherd

Great factsheet - sums it up nicely.

oakley

Thanks for the factsheet, definately food for thought on one or two of our redundancies but feel the rest were correctly awarded a tax free PILON by the company breaching the contract and not letting the employee work their notice.

NeilH

oakley wrote: »

Thanks for the factsheet, definately food for thought on one or two of our redundancies but feel the rest were correctly awarded a tax free PILON by the company breaching the contract and not letting the employee work their notice.

Hi

The sixth paragraph of the notice would seem to contradict you. Since you compnay has a "local" practice of PILON, assumed contractual terms apply.

Neil

mc25

Well done all. What an interesting thread. :thumbup1:

payrollpro

Pigpen,

I suppose the key message you will be getting from here is that you were rigth to be confused because there are as many answers as there are questions.

I am not going to add to the confusion, the sad fact is that revenue and customs invarialby manage to find some reason to classify a PILON as taxable remuneration and most employers will comply with this.

One other issue is that where an employer and former employee want to classify a payment as non taxable on the grounds that it is a genuine amount of damages for breach of contract the law states that the compensatory award is the net value of the sum which would have been due as determination under the terms and conditions of employment. The first thing a revenue compliance team will do is establish the payout was gross or net and if it is gross, they will dig further.

Payrollpro