The taxation of termination payments and in particular the distinction between contractual and non-contractual PILONs (payments in lieu of notice) has long been unclear and complicated.

Under the Finance (No. 2) Act 2017, in many cases whether the PILON is contractual or non-contractual will no longer make any difference to its tax treatment, and the payment will be subject to PAYE income tax and employee and employer NICs. 

The new legislation was unclear as regards whether it applied to all PILON payments made on or after 6 April 2018 or only to PILON payments made or on after 6 April 2018 where the employment was terminated on or after 6 April 2018.

HMRC have informally confirmed that the latter is the case, and so the current rules will apply where the employment was terminated before 6 April 2018. It is expected that this informal confirmation will be set out in revised guidance in due course.