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4th June 2024

What is Pay in Lieu of Notice?

When an employment relationship comes to an end, either the employer or the employee is usually required to give notice. This notice period allows both parties to prepare for the change and make any necessary arrangements. However, there are situations where it may be more practical or beneficial for one party to end the relationship immediately. In such cases, pay in lieu of notice (PILON) comes into play.

Understanding Pay in Lieu of Notice (PILON)

Pay in lieu definition

Pay in lieu of notice, often abbreviated as PILON, is a payment made by an employer to an employee in place of a notice period. Instead of requiring the employee to work through the notice period, the employer can choose to terminate the employment immediately and compensate the employee with a sum equivalent to what they would have earned during the notice period.

Legal framework

The UK Employment Rights Act 1996 governs the rules surrounding notice periods and PILON. According to the Act, employees are entitled to a minimum notice period, which varies based on their length of service:

  • One month to two years of service: One week's notice.

  • Two to twelve years of service: One week’s notice for each year of service.

  • Twelve years or more of service: Twelve weeks' notice.

Simply put, employers must either allow employees to work through their notice period or compensate them with PILON.

When is PILON Used?

PILON is used for immediate termination of an employee. There are several scenarios where an employer might prefer to use PILON:

  • Business Interests: If the employee has access to sensitive information or strategic plans, the employer may wish to end their access immediately to protect business interests.

  • Employee Misconduct: In cases of gross misconduct or serious breaches of contract, an employer might choose to terminate the employment immediately.

  • Redundancy: When a role is made redundant, it may be more practical for the employee to leave immediately rather than continue working during the notice period.

How is PILON Calculated?

The calculation of PILON can be quite complicated, there are several ways you can go about this:

  • Basic salary: The basic salary the employee would have earned during the notice period.

  • Contractual benefits: This may include bonuses, commissions, and other regular payments that the employee would have received.

  • Holiday entitlement: If the employee has accrued but unused holiday entitlement, this should be included in the PILON calculation.

Employers must ensure that the calculation of PILON is accurate and reflects the full amount the employee is entitled to during the notice period. Get in touch with a payroll provider at PayEscape to find out more information on calculating PILON within your business. 

What about tax implications?

Under the new rules introduced in April 2018, all PILON payments are subject to income tax and National Insurance contributions, regardless of whether they are contractual or not. This change ensures that PILON is treated consistently with other forms of termination payments.

We can help manage payroll and PILON for your business 

Managing payroll and ensuring compliance with employment laws can be complex and time-consuming. As a leading UK payroll provider, PayEscape can make a significant difference to your business, find out how we can help below:

  • Streamlined payroll management: PayEscape offers a comprehensive payroll management service that ensures accurate and timely payments. This includes handling regular payroll runs, calculating deductions, and managing employee benefits.

  • Compliance and reporting: Staying compliant with HMRC regulations is crucial for any business. PayEscape manages all compliance aspects, including submitting Real Time Information (RTI) to HMRC and generating necessary reports. This ensures that businesses meet their legal obligations and avoid penalties.

  • Dedicated support: PayEscape offers dedicated support to help businesses manage payroll-related queries and issues. Their team of experts is available to provide guidance on complex matters, including the proper handling of PILON.

Final thoughts 

Pay in lieu of notice (PILON) is a valuable tool for managing employment terminations efficiently. It allows employers to end the employment relationship immediately while compensating employees fairly for their notice period. Understanding the legal framework, calculating PILON accurately, and managing the associated tax implications are essential for both employers and employees.

By working with PayEscape, businesses can ensure accurate and timely payments, maintain compliance with legal requirements, and provide employees with the transparency and support they need. Whether dealing with routine payroll runs or complex termination payments, PayEscape is equipped to handle all aspects of payroll management efficiently and effectively. Get in touch online today and see how we can help your business.

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