Tax Free Payments in Lieu of Notice (Pilons)

As a rule Payments in Lieu of Notice (Pilons) are taxable, unless there is no express Pilon clause in the contract of employment and an employer has not established a tradition of paying departing staff Payments in Lieu of Notice.  In this instance the payment is an advance payment of damages, aimed at compensating the employee for the employer’s breach of contract and avoiding a potential legal claim, and will be exempt upto £30,000.

Employers that wish to make tax free Payments in Lieu of Notice should check what they are doing to avoid a tax liability, because if employers incorrectly decide a Pilon is not taxable, HMRC has statutory powers to recover any tax and national insurance contributions, plus penalties and interest owed to it from the employer.


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