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HMRC internal manual

National Insurance Manual

NIM02570 - Class 1 NICs : Earnings of employees and office holders : Payments made on termination of employment : Payments in lieu of remuneration (PILORs)

An employer may enter into a fixed term contract with an employee but, for some reason,may decide to terminate the engagement early.


An employer engages the services of an employee for a fixed term of 12 months.

However, the job is completed in 8 months and the employer has no further need for theservices of the employee.

The employer terminates the contract after 8 months but pays the employee theirremuneration for the full 12 months. The NICs position will depend upon the terms of theoriginal contract.

If the contract provides that in the event of the fixed term being curtailed in any waythe employer will make a payment in lieu of remuneration (a PILOR) for the remainingperiod, then the right to that payment arises out of the terms of the contract. Theemployer and employee have agreed as part of the terms on which the employee will providehis services that the employee shall in certain circumstances be entitled to certainpayments (including the PILOR).

The right to the payment specified in the contract forms part of the rewards for theemployee’s services. The payment is therefore earnings and will attract a Class 1NICs liability.

If the contract does not provide for the making of a PILOR in the event of the employerterminating the contract before the expiry date, then any payment on account of lostremuneration is compensatory. It is not earnings and therefore there is no liability forNICs.

If an employee has contracted to work for a fixed term and the employer has contracted toprovide work for that period, any termination by the employer in advance of the expirydate constitutes a breach of the contract between them and entitles the employee to claimdamages.

The employer’s payment is compensation to satisfy the legal claim to damages and ismade to forestall such a claim. As explained in NIM02520 (onPILONs) a compensation payment does not constitute earnings and does not attract liabilityfor NICs.