EIM12975 - Termination payments and benefits: payments in lieu of notice (PILONs) and gardening leave: general

With effect from 6 April 2018, an element of all payments received in connection with the termination of a person’s employment are chargeable to income tax as general earnings (see EIM13874).

The phrase payment in lieu of notice (PILON) is used to describe a range of payments made in a variety of legal situations. In considering the taxation of such payments it is therefore important to establish the precise circumstances in which they are made.

In particular it is necessary to distinguish between a `PILON and a gardening leave situation. In the latter an employee will typically be given proper notice of termination of employment but told not to attend work during the notice period. As proper notice is given, payment for the period to the termination date cannot properly be described as made in lieu of notice. The payment is simply the salary due for the period of notice and so taxable under section 62 ITEPA 2003 (see EIM00670), whether or not it is paid as a lump sum. In this case, the employment continues to the termination date whether the employee works or not.

In practice it can sometimes be difficult to establish the date of termination clearly. To do so:

  • look at all the correspondence, documents and surrounding facts associated with the termination
  • check the date to which benefits (such as use of a car or medical benefits) are given. Although benefits can be given for post-termination periods, they may support continuation of employment if other factors support that interpretation.
  • consider any approved retirement benefits scheme or registered occupational pension scheme (from 6 April 2006): membership is normally open only to employees

Where a PILON is given instead of notice, how it is taxed depends on when the employment was terminated and the payment was received (see EIM13874) and whether it is contractual (see EIM12976), customary (see EIM12977) or a payment of damages (see EIM12978).