PILON stands for Payment in Lieu of Notice. It is a practice where an employer ends an employee's contract immediately instead of requiring them to work through their notice period. The employee receives a lump sum equal to the pay they would have earned during that time.
How PILON Works
- Immediate Termination: The working relationship ends on the spot. The employee is free to apply for new jobs right away.
- Contractual Right: Employers must have a PILON clause in the employee's employment contract to do this.
- Tax and NI: In the UK, PILON is fully subject to income tax and National Insurance (NI) contributions, just like a regular salary.
- Vs. Garden Leave: Garden leave means the employee stays on the payroll but does not work. With PILON, they are no longer an employee.
Payment in Lieu of Notice (PILON) in BrightPay
A Payment in Lieu of Notice (PILON) is made when an employee's employment ends immediately, and the employer pays the employee the salary they would have earned had they worked their full contractual notice period. The employee does not work their notice; instead they receive payment in place of it.
How to process PILON in BrightPay:
PILON is processed on the employee's final payslip as part of their leaving pay and not as a payment after leaving.
- Enter the employee's leaving date in their record
- Go to their payslip for the final pay period
- Add the PILON amount as an Addition on the payslip; create or select an addition type such as 'Payment in Lieu of Notice' or 'PILON'
- Set the tax treatment; PILON is subject to PAYE tax and National Insurance in full, as it forms part of the employee's contractual pay
- Process and finalise the payslip as normal
- A P45 will be generated based on the leaving date entered
Note: PILON is different from a redundancy or termination payment; it is fully taxable and NIC-able and should not be confused with ex-gratia or redundancy payments, which have different tax treatment.
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