A: Guidance on termination payments when an employee leaves can be found at:
The principal point to note here is that anything that can be construed as pay must be paid through the payroll and subjected to deductions of Income Tax PAYE and NIC. This includes unpaid wages, salaries, overtime, holiday pay, bonuses and commissions.
Payments made to the employee instead of working during a notice period - often referred to as payment in lieu of notice (PILON) - are sometimes the source of confusion. These were historically considered to be part of severance pay and were paid gross. However, the Regulations changed several years ago and now expressly state that PILON which is paid in accordance with a contract of employment is pay and hence should be subjected to deductions of PAYE/NIC. The PILON rules similarly apply to payments made in respect of what is often referred to as “gardening leave”.
The treatment of PILON contrasts with how additional severance or enhanced redundancy payments given to a departing employee are treated. The crucial difference is that the additional severance or enhanced redundancy payments are “ex-gratia” or non-contractual ; whereas PILON is recompense for not working a notice period for which payment is the employee’s contractual entitlement.
These publications from Markel Tax were correct at the time of going to press and should be considered as principles-based guidance only. To check current validity, call the Markel Tax helpline. ICAEW (as distributor) disclaims all liability for any errors or omissions.
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