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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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Class 1 NICs : Earnings of employees and office holders : Payments made on termination of employment : Payments in lieu of notice (PILONs) : Expectation, custom and ‘’automatic’’ payments

Written contracts

Where there is a written contract there is usually no difficulty in determining whatthe terms of the contract of employment are. They are those terms which are set out in thecontract documents.

It is also worth remembering that the Employment Rights Act 1996 requires the employer toprovide the employee with written particulars of the terms of their employment. Thesewritten particulars can be used as evidence of the terms of the employment.

Expectation or custom

However, even if there is no contractual entitlement to a payment there may be aliability for NICs if it is customary to make such a payment. This can be the case inrespect of PILONs where there is no written provision for such a payment to be made butthe employer always makes such a payment instead of giving the necessary notice. This canbe described as a ‘custom’ or ‘expectation’ but it does not mean thatthe payment is in any way contractual. The payment is one made‘’automatically’’ without any consideration of individualemployees’ circumstances.

You should not be misled by the terminology but should rather look to determine the natureof the payment. As long as it is a consistent pattern in the workplace that a PILON willalways be made in place of the due period of notice, and the process is automatic, thenthe payment will effectively form part of the employment relationship which underlies theservices which the employee provides. It will therefore be earnings for the purposes ofNICs (see NIM02010 for information regarding the meaning of“earnings”). This may be the case even if the individual employee claims to beunaware of the condition. The important point to establish is not whether an individualknows about the practice but whether it is an expected part of the employment relationshipwhere the individual works.

Remember also that an expectation or custom can be industry-wide or confined to a smallgroup within a business.

Another important point to bear in mind is that the length of time the custom orexpectation has been in place is not a crucial factor. It is more important to determinewhether the condition is an expected part of the employment. It is therefore possible foran expectation or custom to be established very quickly where it is clear to employeesthat an employer intends to follow a particular line.

Procedures in place to determine PILON

You should not normally contend that an expectation or custom exists if the employerhas in place a procedure for assessing what payment is to be made to employees who do notreceive full notice. If there is a genuine critical assessment of individualemployees’ circumstances so that PILONs are not made automatically, no custom willhave been established. Such an assessment could involve, for example, deciding whether anemployee is likely to find another job within the notice period or taking into accountwhat benefits would have been received. In these circumstances the individual could not becertain that a particular payment would be made in lieu of notice and therefore there isno ‘’expectation’’ or ‘’custom’’ and the PILON isnot ‘’earnings’’ for NICs purposes. It is more likely to representcompensation or damages and there will be no liability for NICs.

If, however, employees are invariably given a gross PILON as the result of the procedurebeing applied then the question arises whether a genuine critical assessment is beingmade.