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The safety of our staff and clients is of paramount importance to us and so thank you for your continued co-operation during these unprecedented times.
Whenever an employee finds their employment terminated, whether by reason of redundancy or under a compromise agreement there are taxation issues which arise. The Question is what is taxable? This brief article will focus only on the right to Notice and/or a ‘Payment in lieu of notice’ (“PILON”)
Under the Income Tax (Pensions and Earnings) Act (‘the Act) all normal income is subject to payment of income tax and national insurance provided an individual will earn over a minimum level as prescribed by the government from time to time. Tax codes are provided to assist employers with managing the liabilities via their regular PAYE payroll throughout the year.
However, parliament has foreseen certain circumstances whereby income tax and national insurance should not be deductible from payments made, for example. in respect of say a statutory redundancy payment, and therefore under limited circumstances some payments may be exempt. The relevant exemptions for the purpose of this article are contained between s.401 and 406 of the Act which allow some payments to be tax free.
Essentially, in a nut shell, the exemptions provide that any sum of damages or payment which does not stem directly from the contract of employment, and up to the value of £30,000, may be paid tax free.
This has given rise to people seeking to utilise the provisions for their own benefit when considering the termination of employment with a view to avoiding payment of income tax and national insurance by receiving a PILON and claiming that it falls within the £30,000 exemption. Is this correct?
As a general rule no; it is highly unlikely that treating a PILON as falling within the exemptions will work, because: