Payment-in-lieu of holiday (PILOH)
Any unused annual leave must be paid to leavers at the end of their contract
Overtaken annual leave can be deducted from the employee's final pay only if it's stated in their employment contract.
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PayFit automatically calculates the annual leave entitlement for leavers if you use the annual leave module in the app.
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βHow is PILOH calculated?
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βThe total number of days of annual leave (including bank holidays)β 365/366 calendar days in the year βοΈ number of calendar days employed = total leave accrued* β holidays taken (including bank holidays) οΌ total to pay or deduct.
*This figure is not rounded, in line with the HMRC guidance that entitlement for leavers does not need to be rounded.
Example
Rihanna's contract started on 1 May 2020 and is ending on 16 July 2020. She has been employed 77 days since the start of the annual leave year.
She has an annual leave entitlement of 28 days + 8 bank holidays, 36 days in total.
Her pro-rated entitlement is 36 days/366 calendar days x 77 days worked, 7.57 days.
She's taken 3 annual leave days this holiday year, leaving 4.57 days remaining.
How is annual leave pay calculated for leavers?
Based on your company setup, to calculate the amount to be paid for the remaining annual leave days you have two options:
Option 1
Annual salary β business days in the year. The resulting amount βοΈ the remaining days to be paid οΌ the amount to be paid for PILOH.
Option 2
Annual salary β working weeks in the year β working days per week. The resulted amount βοΈ the remaining days to be paid οΌ the amount to be paid for PILOH.
Payment in lieu of notice (PILON)
PayFit calculates this automatically based on the employee's full base pay and the days in the notice period.
Payment in lieu of notice is payable if the employer stops the employee from working their notice.
PILON is also payable if the employee doesn't complete their notice period but the employment contract says that the employer will pay for unworked notice.
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PILON is not paid if an employee is dismissed due to gross misconduct (PayFit won't calculate PILON in this situation).
PILON should be based on the base pay + any contractual benefits the employee is entitled to. PayFit will calculate PILON based on base pay and you can add any PILON related to benefits separately.
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Tax and National Insurance treatment of PILON
The tax and National Insurance treatment of PILON is relatively simple as it never changes, there are no exceptions to the rules that:
All PILON is subject to tax
All PILON is subject to Class 1 National Insurance for employees and employers
How is PILON calculated?
The typical calculation for this is Annual salary β 262 business days in a year βοΈ notice working days (this can be seen in the Calculation preferences at the Company level).
Example
Rihanna's notice was given on the 16th of June.
The notice period is 4 weeks and ends on the 13th of July.
As she is working only 11 days of 20 working days in the period notice, she will be entitled to PILON for the 9 remaining days.
PayFit app allows you to override the value calculated on the same screen to include things such as contractual benefits.