PILON – Payment in Lieu of Notice: Q’s on Pension deductions / benefits included?

[MisTaken]

I have been viewing this site for a while, and feel rather guilty for asking a question before being able to contribute but here goes anyway.

 

I am about to enter into a compromise agreement with my employer, who is terminating my contract of employment after a period of sickness where I have not received any salary for a long period of time.

 

As part of this compromise agreement my solicitor asked if they were to make a payment in regards to ‘payment in lieu of notice’. My employer has quoted a monetary figure, which covers my notice period.

 

There are two areas I am unsure about:

 

1. I was originally asking the question - is that this payment made to me, which I have been told is subject to PAYE, should have pension contributions taken from it?

 

i.e. under normal circumstances out of my ‘salary’ I make a contribution and if I make a contribution then so does the employer.

 

2. In regards to the ‘notice period’ regarding benefits -

 

· Should my medical insurance continue for the period up to the end of the notice period?

 

· And should the holiday payments accrue beyond the ‘termination date’, to the end of the notice period date?

 

Any advice is greatly appreciated.

 

thanks

 

PS I can't ask my solicitor any question at the moment, which is why I am on here.

[Sidewinder]

Hi MisTaken and Welcome! Don't feel bashful about posting - just promise to keep coming back not only for this issue, but for any other information which other parts of the site may be able to provide!

 

As far as I can gather from your post, your employer has offered a compromise agreement and you want to know whether:-

 

The payment will be subject to Tax and NI?

This would depend on whether the payment represents 'damages' for an agreed breach of your contract, and is a complicated matter. If your contract entitles you to notice and the employer is willing to pay you off and you not work the notice, then PILON can (in certain circumstances) be paid tax free. There may be issues around what is specified in your contract with regard to Notice, which will clarify this, but surely the Solicitor is best placed to advise on this?

 

Whether the payment is subject to deductions for Pension Contributions?

Whether your medical insurance continues to the end of your Notice period?

Normally on severance, deductions and benefits would both continue to the end of the period of employment, but this would seem to depend on Point 1 and exactly what the payment is stated to represent in the CA. If the CA is worded in such a way as to confirm a payment equivalent to a period of notice, then the Pension and Medical Insurance should be deducted as they would have been paid in the event of you still working there for the entire period of notice (and in turn the Employer should also be bound to make their normal contribution for the entire period), but if it is just an agreement to pay you a sum of money in order to waive your rights, then the payment should not be subject to deductions, nor should you expect to enjoy any benefits such as Medical.

 

I know what I mean so hopefully that makes sense! The Solicitor really should be the one answering these questions though, so hopefully you will be able to ask soon.

[MisTaken]

Hi Sidewinder,

 

Many thanks for your prompt response.

 

To clarify, the CA states : "as a contractual payment in lieu of x weeks notice the sum of xx less PAYE deductions", however I do not see anything in my contract which states this payment is 'contractual' and so I need to ensure if it is in my contract.

 

I have a few more comments below:

 

 

 

The payment will be subject to Tax and NI?

This would depend on whether the payment represents 'damages' for an agreed breach of your contract, and is a complicated matter. If your contract entitles you to notice and the employer is willing to pay you off and you not work the notice, then PILON can (in certain circumstances) be paid tax free. I think this is the case, but my solicitor is not interested in going into this level of detail! Long story, but I'm a bit on my own in regards to this issue and there are time limitations with a deadline for signature.

There may be issues around what is specified in your contract with regard to Notice, which will clarify this, but surely the Solicitor is best placed to advise on this?

 

Whether the payment is subject to deductions for Pension Contributions?

Whether your medical insurance continues to the end of your Notice period?

Normally on severance, deductions and benefits would both continue to the end of the period of employment, but this would seem to depend on Point 1 and exactly what the payment is stated to represent in the CA. If the CA is worded in such a way as to confirm a payment equivalent to a period of notice, Yes this is the case as the quote above shows, then the Pension (still waiting for an answer) and Medical Insurance I have today received confirmation from the employer this is true should be deducted as they would have been paid in the event of you still working there for the entire period of notice (and in turn the Employer should also be bound to make their normal contribution for the entire period) This is the key issue for me, and one I hope the employer realises , but if it is just an agreement to pay you a sum of money in order to waive your rights, then the payment should not be subject to deductions, nor should you expect to enjoy any benefits such as Medical.

 

I know what I mean so hopefully that makes sense! The Solicitor really should be the one answering these questions though, so hopefully you will be able to ask soon.

[Sidewinder]

Your contract is central to this. If it makes no mention of Payment In Lieu of Notice (ie 'In the event of termination, you are entitled to receive x weeks notice - or a payment in lieu of that period') or a previous history as regards other departures, then it can reasonably be established that what the employer is proposing to pay might be considered compensation (or damages) for not giving the contractual period of notice. Damages payments are not subject to tax or NI (as long as the payment does not exceed £30,000).

 

If this central point is clarified then the others follow on.