Previously, it was accepted that if the worker did not have a PILON (payment in Lieu of Notice) clause in his contract, his termination indemnity could be paid tax-free as gross value. This is due to the fact that in the absence of a contractual right, the payment technically constitutes a breach instead of a replacement. If you have salary arrears up to the date your transaction agreement terminates your contract, these will be taxed as usual, with the usual deductions for taxes and social insurance. It is important to use legal advice when deciding whether or not to include a payment in the contract instead of the disposition, as its inclusion may affect your ability to impose restrictive agreements against the employee. Restrictive agreements aim to prevent employees from obtaining confidential information, trade secrets, etc. and/or to recruit or process customers for a specified period of time after the termination of the business. Restrictive federal law is a challenge and it is recommended that you get advice before establishing a right. There are also important tax provisions. However, there is often some confusion as to the tax treatment of a payment instead of termination („PILON“) and whether it can be included as part of the tax deduction or whether taxes and social insurance must be properly paid there. You should make the PILON a date within the notice period to which the employee is entitled to something you want to avoid (for example. B a bonus or stock options).
This will only work if you have the contractual right to do the PILON without paying the lost duties. A compromise agreement is a single agreement that defines the financial conditions and all other conditions under which the employment relationship ends. The compromise agreement must meet certain requirements to be considered legally binding, including in writing, signed by both parties and the worker must have received independent legal advice. The worker is then not in a position to bring an action a posteriori before the courts or a labour court. For the agreement to be legally binding, the employee must seek independent professional advice prior to signing, to confirm that they understand the conditions to which they are consented, for example. B the waiver of his rights under labour law. In most cases, the allowance is less than £30k, which is the tax threshold, and is offered as a lump sum. However, the employer will sometimes include in this allowance a number of contractual payments such as vacation pay and termination. In fact, these are taxable payments.
If the employer wishes to introduce a confidentiality clause or a restrictive agreement in the settlement agreement, the employee must receive a sum of money qualified as „consideration“ for the clause to be mandatory. As a rule, this is a protection tax, but is normally taxable and is subject to social security. If the comparison exceeds the £30,000 exemption, you are in most cases taxable. In recent times, we have encountered a growing number of more cautious employers who are not willing to rely on the absence of a PILON clause to pay a very high redundancy payment. In addition, it has become more common for large employers to enter into an agreement with hmRC in order to always collect tax notices that are paid instead of amounts – in order to guarantee maximum revenue to the state. We advise you to seek a lawyer before creating a PILON if there is no agreement for you to assess the consequences of a breach of the employment contract and how you can handle it. . . .