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HMRC internal manual

National Insurance Manual

NIM02530 - Class 1 NICs : Earnings of employees and office holders : Payments made on termination of employment : Payments in lieu of notice (PILONs) : Contractual PILONs

In addition to specifying the period of notice, a contract of employment may provideexpressly for a sum to be paid instead of that notice being given.

Such wording in a contract means that the contract actually provides that in the event ofthe employment being terminated prematurely a PILON will be made.

The intention behind this payment is exactly the same as in any PILON situation. Theemployer wishes to satisfy the employee’s entitlement to damages in the event of therequired notice not being given. The payment is therefore included in the contract as analternative to the period of notice to forestall any possibility of legal action fordamages. In the event that the due notice is not given there will be no breach of contractas long as the alternative payment is made – there can therefore be no action fordamages in respect of a breach of contract.

The PILON is contractual because the payment is provided for in the contract ofemployment. Where a PILON is paid in such circumstances the payment is earnings forthe purposes of Class 1 NICs because it is something to which the employee becomesentitled as part of the terms on which they agreed to provide their services. It istherefore part of the employee’s rewards for their labour – and satisfies thedefinition of “earnings” in section 3(1) of the Social Security Contributionsand Benefits Act 1992 because it is “remuneration…derived from anemployment”. See NIM02010.

‘Discretionary’ PILONs

In some cases, the contractual arrangements may give the employer a choice ordiscretion of either giving the required notice or making a PILON. In such a case anemployer may decide not to give proper notice and also not to make a PILON under thecontract. If he takes this line, the terms of the contract will be breached, and anypayment made in respect of that breach will be a compensatory payment made inconsideration of the individual’s entitlement to damages as a result of the breach.

You should examine the evidence carefully in these cases to confirm that the employeractually chose to breach the contract. The tax case of Richardson v Delaney (to bereported) is an example of a case where the High Court rejected the employer’s claimthat such a breach had occurred.

See examples 2 and 3 in SE13924.