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Know the score with Settlement Agreements

No we are not talking about those big towers that carry our electricity around the country but payments made by employers when full notice of termination is not given.

From this month all payments made in lieu of notice when an employee’s role is terminated are taxable.  Until now, no tax or National Insurance contributions were paid on any PILON payments if the employee’s contract did not contain a clause stating that payment can be made in lieu of notice.  This enabled employers and employees to make PILON payments as compensation for breach of contract on which no tax or NICs were payable.  

This will affect Ayrshire employment law clients because, from the employer’s point of view, a ‘tax free” payment was an attractive offer to entice an employee to enter a Settlement Agreement and leave employment.  From the employee’s point of view they in effect received pay in advance, without having to do any work for it and without it being taxed, and so it would soften the blow of leaving their employment.  

With the new arrangement PILON payments will always be taxed so these benefits to both employer and employee are lost.  However, compensation payments of up to £30,000 remain tax free.  HMRC are likely to look more closely at these compensation payments to make sure they are not simply PILON payments by another name.  It is essential that employers and employees get expert advice on the terms of any Settlement Agreements they enter into to ensure they provide the protection and benefits required.

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