Termination Pay & PILON

If you need to process termination pay for an Employee, you will need to refer to the Employee's Termination Agreement to see how the payments should be processed.

E.g. Which elements of pay are taxable, and which are not. You should have received legal advice on this, and should process the payments in accordance with the agreement.

Redundancy Pay

Redundancy payments are usually free of Tax and NI deductions up to the value of £30,000. To add a tax-free redundancy payment to an Employee, you will need to:

1. Go to the draft payroll containing the employee.
2. Select the employee to reveal their payslip.
3. Select Add Pay Item and choose Net addition.
4. Under the Type dropdown, select the Redundancy pay (non-taxable) option.
5. Enter the value and select Done.

You can watch a Demo here.

Redundancy Pay above £30,000

If the redundancy payment exceeds £30,000, you will need to process the first £30k as per the steps above. The remaining value will then be subject to Employee tax, and Employer NI (as per updated HMRC Guidance from April 2020). To add taxable redundancy to an Employee, you will need to: 

1. Go to the draft payroll containing the employee.
2. Select the employee to reveal their payslip.
3. Select Add Pay Item and choose Gross addition.
4. Under the Type dropdown, select the Redundancy pay option.
5. Enter the value and select Done.

Note – It is important you select the pre-defined pay item as Pento has set it up to ensure it applies the correct Employee & Employer settings.

You can watch a Demo here.

PILON

PILON payments are usually subject to the standard PAYE deductions. E.g. Tax, Employee NI & Employer NI. To add PILON to an Employee, you will need to:

1. Go to the draft payroll containing the employee.
2. Select the employee to reveal their payslip.
3. Select Add Pay Item and choose Gross addition.
4. Under the Type dropdown, select the Notice pay option.
5. Enter the value and select Done.

You can watch a Demo here.

Making Termination Payments ahead of payroll

Most Termination agreements have a strict timeline the payments need to be made by. If you require a payment to go out to an employee outside of payroll, you can choose to either make the payment to the Employee directly or contact Pento Support for one of our agents can assist you. 

Please note, you will need to do one of the following to ensure the Employee doesn't get paid again on payday:

1. Add a net deduction of the payment value to the payslip (the Net pay should now show as £0)
2. Update the Employee's Bank details to:
   • Sort code: 11-11-11
   • Account Number: 12345678

Termination Payments after an employee has left

If you are making a termination payment (including PILON and any taxable redundancy pay in excess of £30,000) to an employee after they have left your employment, you will need to process the payment as a Payment After Leaving (PAL)

For further guidance on PALs, please refer to our help article Payment After Leaving (PAL)

CIPP's Termination Payments factsheet