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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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NIM02540 - Class 1 NICs : Earnings of employees and office holders : Payments made on termination of employment : Payments in lieu of notice (PILONs) : Termination of employment by agreement

If the employer and employee both agree that the employment should terminateimmediately on payment of a “sum in lieu of notice” – that is, on paymentof a PILON – this subsequent agreement between the parties does not constitute a termon which the employee agreed to provide their labour. See NIM02530 forguidance regarding contractual PILONs.

The payment represents the price the employer is paying for the employee’s agreementto forego the notice to which they would otherwise be entitled, and is being made tocompensate the employee for the loss of earnings during the period of notice.

It cannot, therefore be regarded as a reward for labour. It does not constitute earningsand therefore no NICs are due in respect of the payment.

But see also SE12855 and SE13924 for general information regarding “compromiseagreements”.