Pay in lieu of Notice – When does tax apply?

Making a payment in lieu of notice (PILON) is a way of ending an employment contract with immediate effect meaning that the employee will not work a notice period. An employer will make a payment of the amount that an employee would normally have been paid if they had worked the notice period.

Whether tax is payable on the PILON all depends on the contractual agreement between the employer and the employee and whether it is usual

practice for the employer to make this type of payment.

If under the terms of the contract, the employer has the right to make a payment in lieu of notice then the payment is made as part of the contract and taxable.  The same would apply if it was customary for the employer to make payments in lieu of notice when terminating an employee’s employment regardless of which party chose to give notice to end the contract.

If however, PILON is not covered in the employee’s contract of employment nor customary practice for the employer to make this type of payment, then PILON would be treated as damages for a breach of contract on the part of the employer and so would not be taxable.

Other payments made at the time of leaving such as holiday pay will be taxable as they are a contractual payment.

For more information on PILON please see:

Court ruling that Overtime should count in Holiday Pay

What does this mean for your business?

In November 2014, a landmark Employment Appeal Tribunal case ruled that employees have the right to claim for overtime to be included in their holiday pay if the overtime is regular or compulsory. The Tribunal has not clarified whether this could also benefit staff who work voluntary overtime.

The ruling was based on the supposition that UK had incorrectly interpreted the EU Wide working time directive, which was implemented into law as the Working Time Regulations in the UK in 1988. The current legislation in the UK states that holiday should be paid at the basic rate.  This has now changed as a result of these test cases.

It is anticipated that due to the impact this ruling could have on business that an Appeal on this ruling is likely.  If the ruling stands or is appealed unsuccessfully, then employers must include overtime when calculating workers’ holiday pay.  Employers need to consider how they will apply the ruling until any appeal process which may take a considerable length of time, has been completed

The judgement has created a time limit on how far back employees can backdate claims of overtime on their holiday pay, which means employees must make a claim within 3 months of taking their holiday or they lose their right to make a claim.

ACAS have produced useful guidance on overtime, commission and other payments to be considered when calculating holiday pay for employees.

Changes to HMRC requirements for employment Intermediaries take effect on 6 April 2015

The HMRC are responding to increased false self employment on the part of employment intermediaries acting on behalf of self employed workers who should legally be regarded as employed, and therefore attract the same rates of Tax and National Insurance as an employed person would do.

From 6 April 2015, Employment Intermediates must send details of workers they place with clients who are not:

  • Direct employees or,
  • Being treated as employees.

The HMRC has published Draft Reporting Regulations for which the consultation period has just ended (25 November 2014).

For more information about this change and the possible impact it might have to your business see the HMRC website

New penalties for late submission of payroll information

What you need to know

The HMRC has introduced penalties for employers who report their payroll information late.  These apply from:

  • 6th October 2014 for employers with more than 50 employees
  • 6th March for employers with less than 50 employees

A penalty can be charged if:

HMRC will not charge a penalty if you are a new employee and you have sent your first FPS within 30 days of paying an employee or if it’s the first failure within the tax year to submit your report on time.  This also will not apply to employers with fewer than 50 employees for the Tax year 2014-15.

For more information about how to avoid penalties for late submission see the HMRC website

Thinking of hiring an Apprentice? Here’s some advice to get you started

If you are a business the buzz around apprenticeships won’t have escaped you.  There are a lot of good news stories in circulation which show how apprenticeships are benefitting businesses, particularly SME’s, and providing young people with the opportunity to learn new skills.  Providing young people with a real route to a career through the Apprenticeship scheme is good news for everyone.

What may be less clear is how to get started if you are interested in taking on an Apprentice.


Businesses may be able claim up to 5 different grants to cover the initial costs of hiring an Apprentice, which includes £1,500 in the form of an Apprenticeship Grant for Employers of 16-24 year olds.

The funding criteria is due to change in January 2015, so you may wish to look at advice on funding via the website

General Information

An Apprenticeship normally lasts for a minimum of 13 months and can last up to four years.  This is an investment for a business but gives business owners a real opportunity to shape and develop their workforce.

It is worth noting that an Apprentice does become your employee and has full employment rights as would any other employee.

Apprenticeship schemes are facilitated through local colleges and independent training providers, and they can offer more advice and support to get you started. The Apprenticeships Website includes a search facility to help employers locate training providers depending upon the type of apprenticeship being offered.