tax free?

tax free?

Didn't find your answer?

A client offered a job to an individual and they signed contracts of employment

before employment commenced, they decided they didn't need the employee (lost business) and so informed him they did not need him anymore.

As the contract was signed he is entitled to one weeks notice and they have paid him this as £961 (£50k salary) and deducted no tax and NI

My question - should it have been taxed as it was a contractual notice payment - my thoughts are it should have been taxed - in which case should teh £961 now be treated as net and grossed up

Thankyou

Replies (9)

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Woolpit Gus
By nutwood
07th Sep 2012 14:05

I would ask myself whether the amount was paid by reason of the unwanted additional employee's employment.  I would answer with the opinion that the employment had not actually commenced so the answer has to be 'no'.  In fact he never became an employee of your client so how could it be taxable?

 

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Euan's picture
By Euan MacLennan
07th Sep 2012 14:06

Tax & NIC free

They have not paid him to work out 1 week's notice.  They have broken the contract and paid him compensation in lieu of notice for not working the week.

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By George Attazder
07th Sep 2012 14:06

It's an anticipatory breach of contract

The payment is damages for the anticipatory breach.  It can't possibly be reward for services, because no services have been performed.

Non-taxable compensation in my opinion.

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By Jimess
07th Sep 2012 14:07

Payment made in lieu of notice?

If the payment was made in lieu of notice then my view is that it is a contractual payment and therefore taxable. It might be a good idea to have a good discussion with your client about what they perceive the payment to have represented and take a look at the contract to establish that the payment was contractually necessary. 

Kind regards

 

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By SThornton
07th Sep 2012 15:52

PILON can be both taxable and non-taxable.

 

In this instance, I would have said it was taxable.

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By Ding Dong
07th Sep 2012 15:59

contractual

In this case the new employee had signed a contract and so therefore it was binding (she had threatened legal action if they did not pay him the contractual notice) so they duly paid up the £961.

However, my understanding of PILONs is if they are in teh contract then they are taxable but (in my client's interest) gladly be proved wrong!

Also, this therefore means they will need to obtain Mr X's NINO to add him to the payroll.

- I was hoping it was a simple question.....!

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By Steve Kesby
07th Sep 2012 16:29

It is a simple question

No services have been performed, so the payment isn't reward for services. It's a payment of damages in respect of the anticipated breach of contract. It's damages, and it's not taxable.

There's an interesting employment law case on the anticipatory breach of an employment contract, but I can't find it at the moment.

Even after the employment has begun, the fact that the contract provides for notice doesn't render a PILON taxable.

PILON's are only taxable if it says in the contract that payment will be made in lieu of notice, or if there is a notorious custom that payment is made in lieu of notice.

PILONs are generally liquidated damages though and won't be taxable unless the total payments relating to a termination of employment exceed £30K.

In this instance though, because there have been no services performed, it can be nothing other than damages for the anticipated breach.

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By Ding Dong
07th Sep 2012 16:33

Thanks all

for those who have helped on a sunny Friday - time to go to the pub now....!

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By Steve Kesby
07th Sep 2012 16:53

Found it!

CScape Strategic Internet Services v Toon. It doesn't say much, but confirms the anticipatory breach point.

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