Employees may receive severance payments, up to a certain upper limit, free of income tax, but may not receive basic pay in lieu of notice (PILON) tax free. Employees pay income tax and Class 1 national insurance contributions (NICs) on the amount of basic pay they would have received if they had worked their notice in full, even if there is no contractual PILON clause in their employment contract.
Once the current upper limit for severance ALONE is reached employees continue to receive exemption from NIC payments on such payments, but employers pay national insurance in full on them.