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HMRC internal manual

National Insurance Manual

NIM02510 - Class 1 NICs : Earnings of employees and office holders : Payments made on termination of employment : General guidance

NIC liability on payments made on termination of employment, particularly payments inlieu of notice (PILONs) and payments in lieu of remuneration (PILORs) and redundancypayments, has for some time been a source of difficulty. The main problem arises in tryingto decide whether such payments are :

  • essentially compensatory in nature. In that event there would be no liability for NICs.
  • really payments of earnings on which NICs are due.

A compensation payment usually relates to the recompense offered and accepted inrelation to the cancellation of a contract. It must be distinguished from a payment givenunder the terms of a contract.

For example, a compensation payment may take the form of a sum awarded as damages by acourt where an employer breaches the terms of a contract of employment, possibly by notgiving the required period of notice of termination of the employment. Alternatively, itmay be a sum negotiated to prevent court action.

Compensation payments can also be described as ‘ex gratia’ payments or‘golden handshakes’. If so, consider the agreement reached between the employerand employee to see whether or not it falls within the description of a compensationpayment outlined above.

You should remember that it is important always to establish the exact nature of a paymentby determining the reason for its being made. You should not be misled by how the employertitles the payment and you must always look at the facts surrounding the making of thepayment rather than relying on what the employer calls it.

See also :