SE12975 - Termination payments and benefits: payments in lieu of notice (PILONs) and 'gardening leave': general

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 19 ICTA 1988 ( SE00670), 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:

• look at all the correspondence, documents and surrounding facts associated with the termination
• check the date to which benefits (such as use of a car or medical benefits) are given. Although benefits can be given for post-termination periods, they may support continuation of employment if other factors support that interpretation
• consider any approved retirement benefits scheme: membership is normally open only to employees

Where a PILON is given instead of notice, how it is taxed depends on whether it is contractual (see SE12976), expected or customary (see SE12977) or a payment of damages (see SE12978).

There are general articles on PILONs in the August 1996 edition of Tax Bulletin (TB24B) and in the "Schedule E & NICs Bulletin" to be issued in September 2001.