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Termination Payments and PILONs: What is Taxable?

8th February, 2013

An executive’s tax return was investigated due to a payment of £123,750 which was paid to him on his termination of employment. The case of Goldman v Revenue and Customs Commissioners [2012] UKFTT 313 (TC) involved the former executive, Mr Goldman, appealing against an amendment to a previous tax return by the Respondent commissioners.

When Mr Goldman began his employment with his former employer, he negotiated a clause in his contract of employment to provide for a payment in lieu of notice “to make a payment in lieu of notice … within 14 calendar days of the Termination Date” (“PILON”) should his employment be terminated. The PILON was broadly equivalent to 12 months salary. Six months after he commenced employment, he was dismissed without notice and his employer failed to make the PILON within the agreed 14 day period. After negotiations, Mr Goldman and his former employer reached a settlement in which Mr Goldman received £123,750. This was less than the entitlement in his contract of employment. Although this payment was described as a PILON in the settlement, when Mr Goldman completed his tax return, he did so based on the first £30,000 not being taxable as it was a payment following termination of employment within the Income Tax (Earnings and Pensions) Act 2003 Pt 6.

The commissioners in this case argued that the payment was “general earnings”, “taxable earnings” and “net taxable earnings” and therefore claimed that Pt 6 did not apply. Mr Goldman based his appeal on the fact that the payment was a payment in settlement of a claim for wrongful dismissal rather than a PILON; therefore it fell within Pt 6. The tribunal dismissed Mr Goldman’s appeal. It was held that:

  1. A PILON made in pursuit of a provision within a contract of employment, enabling the employer to terminate the employment, was to be regarded as an emolument from that employment;
  2. There was no doubt that if Mr Goldman had received a payment to the full extent of his entitlement under his contract of employment it would be considered an emolument of his employment; and
  3. Therefore there was no reason why the payment he received should be any different as the negotiations between Mr Goldman and his former employer were aimed at enforcing his contractual entitlement.


Taking into account the fact that there was no real force to Mr Goldman’s claim that he was settling for wrongful dismissal, or that the payment was damages for breach of agreement, the payment was held to be his contractual entitlement and therefore the full amount of £123,750 was considered “earnings” and was liable to tax.

This case highlights the importance of being aware of tax issues facing your business when terminating employment. Our specialist solicitors at Aaron & Partners can advise you in relation to the issues which may result when doing so. For advice or further information please contact Clive Pointon by sending an email to [email protected] or via telephone on 01244 405513.

For further advice or information regarding any employment queries, please contact Claire Brook by sending an email to [email protected] or via telephone on 01244 405575.

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