It is often assumed that payments in lieu of notice of up to £30,000 are tax free. However these payments are taxable if they are part of the contract of employment.

In a recent particular case of SCA Packaging Ltd v R & C Commrs, HMRC argued that because SCA had established a common practice of making these payments that they had effectively become contractual and part of the contact. The Commissioners however ruled against the taxman, saying habitual payments of this kind shouldn't always be treated as contractual.

When a PILON is taxable and when it isn't can be quite a complex area but if employment contracts are set up correctly you can pay staff tax free up to £30,000 when they leave. In some circumstances this will also be possible for directors of their own company but specialist advice is essential.

Getting the treatment of PILON's wrong can be significant for the employer who would be faced with the tax and NI bill on the payment, plus potential interest and penalties.

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