PILONs, termination payments and tax

Most employers will be familiar with the concept that if a contract of employment gives an employee the right to receive a payment in lieu of notice (PILON) on termination, such a payment will be subject to tax and national insurance contributions (NICs).

Where there is no contractual entitlement to a PILON, employers in breach of contract by not allowing an employee to work their notice period would generally seek to pay a non-contractual PILON and have this treated as damages for breach of contract.