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 terminate immediately on payment of a ”sum in lieu of notice“, that is, on payment of a PILON - this subsequent agreement between the parties does not constitute a term on which the employee agreed to provide their labour.

See NIM02530 for guidance regarding contractual PILONs.

Also see EIM12855 and EIM13924 for general information regarding ”compromise agreements”.

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

It cannot therefore be regarded as a reward for labour and as a compensatory payment it is not on first principles a payment of earnings for NICs purposes.

But see NIM02555 which explains how, from 6 April 2018, the part of a termination payment that represents the earnings that an individual would have received had they worked their notice period are treated as earnings and subject to Class 1 NICs.