When you make a PILON, employment ends immediately and the payment compensates the employee for what they would have earned during the notice period. Since April 2018, income tax and national insurance contributions must be paid on PILONs.
You should consider making a PILON if you are dismissing an employee and do not want them to attend work during their notice period. This may be the cases where you have concerns about ongoing access to confidential information or business contacts or about disruptive behaviour.
You might also decide to make a PILON at the employee’s request (if it suits you too) or as part of negotiated terms over departure, possibly as part of a Settlement agreement. For more information, read Settlement agreements.
You should make the PILON on a date in the notice period when the employee will become entitled to something that you wish to avoid providing (like a bonus or share options). This only works if you have the contractual right to make the PILON without paying for the lost rights.
You must make sure either that the employee’s Employment contract gives you the specific right to make a PILON or that the employee agrees in advance, preferably in writing.