Pay in lieu of notice - eligible for tax relief?

M

Macker

Registered User
Messages
3
What I've been reading says that pay in lieu of notice is taxed as normal salary when it is specified in your contract, and is not taxed (within limits) when it is not specified in your contract. I have three questions about this:

1) what is the reasoning behind this? I'm presuming there's some subtlety I don't get between notice pay and ex-gratia payments, but why does simply mentioning it in the contract make that difference?

2) if the contract states the company will give one calendar month's notice or (at its discretion) one months' salary in lieu of notice, what happens if an employee has been with the company more than 15 years and is therefore entitled to 8 weeks notice? Does the fact that pay in lieu is mentioned at all mean that the entire 8 weeks is taxable? Does the fact that the employee's rights supercede the contract in terms of length of notice mean that that entire stipulation is void, and therefore the entire payment would revert to non-taxable? Or somewhere in between?

3) again in the same situation as #2, if the company gives 1 month's notice and closes the office, would/should/can they pay in lieu of the remaining part of the notice due as a lump sum, and again would that remainder be taxable?
 
my understanding is that PILON is always taxable unless it is paid because the company terminates the contract without proper notice. In other words, if you took voluntary redundancy and the package included a PILON payment rather then having you work out your notice, that PILON payment is taxable. It's wages paid early. However, if your employer made you redundant today and today for example was deemed to be your last day in employment, then the PILON payment is in effect compensation for loosing out on wages and could be tax free.
 
PILON is taxable as schedule E income. The fact that you're not in the office/workplace carrying out your duties makes no difference for income tax purposes.

A termination payment, on being made redundant, is something different altogether.
 
Thanks for your replies. I may be using the wrong terminology (maybe I'm talking about tax relief as opposed to non-taxable), but here's an example of what I'm talking about (from citizensinformation.ie ... retirement_lump_sum_taxation.html - can't post a link yet)

The following payments are not exempt from tax but may qualify for some tax relief – see ‘Tax-free entitlements’ below.
  • A non-statutory redundancy payment, [...]
  • Payment in lieu of notice (However, if your contract of employment provides for a payment of this kind on termination of the contract, you pay tax and PRSI in the normal way.)
Click to expand...
 
Yes, but notice periods are typically provided for in people's contracts. As a result, pay in lieu of notice is generally taxable as salary. As others have pointed out, compensation for loss of your job is something entirely different.

The salient point is the fact that, had nothing happened, you would have received the pay in lieu of notice anyway in the form of salary. Take someone with a three month notice period. If they stay on, they get three months salary like any of us. If they leave immediately, they get their three months salary upfront. Either way, it's fundamentally the same thing...salary. Intuitively, it should be taxable.
 
Ok, I guess didn't fully take in what thedaddyman was saying.

So, if I'm now interpreting correctly, it's that:
  • If the contract provides for PILON and PILON is given, the contract is being fulfilled, and the PILON is considered salary.
  • If the contract doesn't provide for PILON, then this is an unexpected situation and the PILON may be considered compensation for that.
Is that correct? In which case, if the contract only allows for "1 month's notice or 1 month's PILON", how does this interact with an employee's right to 8 weeks' notice if they've been there >15 years?

Say the company gives the 1 month's notice specified in the contract and shuts down at the end of that period, thereby terminating the employment on that date, and pays a lump sum to cover the remaining 4ish weeks notice entitlement, does that payment then fall into the "compensation for unexpected loss of wages" category because the employee would have expected 8 weeks' notice, and the contract didn't cover that scenario?
 
I would argue that if you are entitled to 4 weeks PILON but are entitled to 8 week's notice under your contract, and are paid for those 8 weeks, then half is taxable as salary and the other half is compensation.

(I argued a very similar point when made redundant a few years ago, the Company & advisors told me 'tuff!' and to take it up with the Revenue that they were going to tax it entirely - I did take it up with the Revenue and clawed-back the excess tax paid)
 
You must log in or register to reply here.
Back
Top