The phrase payment in lieu of notice (PILON) is used to describe
a range of payments made in a variety of legal situations. In
considering the taxation of such payments it is therefore important
to establish the precise circumstances in which they are made.
In particular it is necessary to distinguish between a `PILON and a gardening leave situation. In the latter an employee will typically be given proper notice of termination of employment but told not to attend work during the notice period. As proper notice is given, payment for the period to the termination date cannot properly be described as made in lieu of notice. The payment is simply the salary due for the period of notice and so taxable under Section 62 ITEPA 2003 (see EIM00670), whether or not it is paid as a lump sum. In this case, the employment continues to the termination date whether the employee works or not.
In practice it can sometimes be difficult to establish the date of termination clearly. To do so:
Where a PILON is given instead of notice, how it is taxed
depends on whether it is contractual (see
EIM12976), customary (see
EIM12977) or a payment of damages (see
There are general articles on PILONs in the August 1996 and February 2003 editions of Tax Bulletin (TB24B and TB63 respectively), the Schedule E/NICs Bulletin of September 2001 and the Earnings Bulletin of February 2005 (ebm01/05).