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Settlement Agreement Pilon Tax: What You Need to Know

A settlement agreement is a legal contract between an employer and employee that brings an end to an employment relationship. One of the most common clauses in a settlement agreement is the payment in lieu of notice (PILON), which is a payment made to an employee when they leave their job without having to work out their notice period.

However, many employees are often unaware of the tax implications of receiving a PILON payment, also known as a termination payment. In this article, we will discuss the settlement agreement PILON tax and what you need to know about it.

What is the Settlement Agreement PILON Tax?

The PILON tax is a tax that is imposed on a termination payment made to an employee by their employer. It is a tax on the amount of money that the employee would have earned during their notice period had they worked it out instead of receiving a PILON payment.

Before April 2018, only the part of the termination payment that represented the basic pay for the notice period was subject to tax and National Insurance contributions. The remaining amount of the payment, such as bonuses and benefits in kind, was generally tax-free up to a certain amount.

However, since April 2018, all types of termination payments, including PILONs, are now subject to income tax and National Insurance contributions. The only exception is if the employee is receiving a statutory redundancy payment, which is tax-free up to a certain amount.

How is the PILON Tax Calculated?

The amount of the PILON tax depends on several factors, such as the employee`s tax rate, the amount of the payment, and any deductions that may apply, such as student loan repayments.

If the payment is made under a contractual PILON clause, the tax is based on the amount that the employee would have earned during their notice period. However, if the payment is not made under a contractual clause, the tax is based on the amount of the payment itself.

It`s important to note that the PILON tax is subject to change, so it`s always best to consult with a tax expert or accountant to determine the correct amount of tax that should be paid.

Conclusion

In summary, the settlement agreement PILON tax is a tax that is imposed on a termination payment made to an employee by their employer. It is important for employees to be aware of the tax implications of receiving a PILON payment to avoid any unexpected tax bills.

If you`re an employee who is receiving a PILON payment, it`s always best to seek advice from a tax expert or accountant to determine the correct amount of tax that should be paid. As a professional, I hope this article has provided you with valuable information on the settlement agreement PILON tax.

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