Taxation of PILON

Can you decipher this wording?

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Client is about to be made redundant. Part of the termination payment is described as follows:

"You and the Company agree that the amount of the PILON is equal to or exceeds the amount given by the formula in 402D ITEPA 2003 and, accordingly believes that the Employee’s Post Employment Notice Pay within the meaningof 402E of ITEPA is nil."

I'm having trouble parsing this text. If the PENP is nil, then doesn't that mean the PILON is taxable as earnings? However, the thrust of the agreement seems to imply that the payment is eligible for the £30k exemption.

Replies (15)

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By the_drookit_dug
18th Dec 2020 12:24

What does the employment contract say? Does it entitle the employer to make payment in lieu of notice?

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Replying to the_drookit_dug:
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By The Dullard
18th Dec 2020 12:28

What difference does that make under the new rules?

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Replying to The Dullard:
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By the_drookit_dug
18th Dec 2020 12:38

I agree that the PILON is taxable. Just wondered if this was where the idea that the PILON may not be taxable is coming from.

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By The Dullard
18th Dec 2020 12:31

Under the new rules, PILONS are always taxable. Only the first £30K of redundancy and termination payments can be non-taxable.

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By SteveHa
18th Dec 2020 12:41

It looks to me like they are referring to any excess of PENP pay over that reached by the formula, and that they have paid no excess so that is NIL.

I don't read it as meaning that the PILON is NIL.

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Replying to SteveHa:
Red Leader
By Red Leader
18th Dec 2020 12:45

So therefore taxable as earnings, and not eligible for the £30k exemption?

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By the_drookit_dug
18th Dec 2020 13:05

No, not eligible

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Replying to Red Leader:
By SteveHa
18th Dec 2020 13:07

That would be my reading.

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Replying to SteveHa:
Psycho
By Wilson Philips
18th Dec 2020 13:05

I can understand the confusion.

For starters, 402E does not define PENP, it defines trigger date and the post-employment period.

If the amount of the 'PILON' exceeds the 402D formula, then the excess should be covered by the £30k exemption. I have no idea what it is that they are referring to as £nil.

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Replying to Wilson Philips:
Psycho
By Wilson Philips
18th Dec 2020 15:40

I should have better things to do with my time, but I've been thinking about this further. I'm wondering (and it's the only explanation that makes any sense to me) if they have already decided that the PILON is taxable (perhaps it's contractual). And then applying this as 'T' in the formula which in this case results in £nil.

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Replying to Wilson Philips:
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By The Dullard
19th Dec 2020 12:18

If you follow the legislation through, a PILON will always be taxable, whether its contractual or not, because the non-taxable bit is a function of how long the notice period is and how much the pay normally is; conventionally, that's how you calculate what payment is due in lieu of notice too!

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Replying to The Dullard:
Psycho
By Wilson Philips
19th Dec 2020 18:51

I’m aware of that, and wasn’t suggesting that it wouldn’t be taxable. I am trying to make sense of the OP’s wording.

If the PILON is contractual then it will be taxable under first principles, and is likely to be T in the formula. If the ‘PILON’ is not contractual then it becomes taxable in accordance with the formula. The outcome will be the same in most cases.

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By frankfx
18th Dec 2020 13:56

Your client should ask for the letter to be written in plain English.

Client may mention that he has an estimated fee of £500 plus VAT for translation services.

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Replying to frankfx:
Red Leader
By Red Leader
18th Dec 2020 16:27

Thanks. I ended up telling the client to get an explanation from the employer.

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By unearned luck
19th Dec 2020 12:46

It doesn't help that the grammar is poor:

"You and the Company...believes that..."

If it has any effect, then that effect is either to subject an element of the payment to tax when it should not be taxed or vice versa. HMRC might disagree, especially if the vice versa applies.

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