Notice periods are a contractual and statutory matter rather than a tax one, but they end up on a payslip and that is where the differences become concrete. Continental European notice periods are long by British or American standards, and the money involved is not trivial.
How long notice actually is
The American position is the outlier and explains a great deal about how differently job changes are experienced. In Belgium or Germany a resignation starts a process measured in months. In most of the United States it can be measured in days.
The three ways notice is served
- Worked notice. You continue working, the payslip is unchanged, and nothing unusual happens for tax. Accrual of holiday, pension and bonus continues.
- Garden leave. You remain employed, are paid in full, and are told not to attend. Tax treatment is identical to worked notice because you are still an employee. Benefits normally continue, and restrictive covenants usually run from the end of the period rather than the start of it.
- Payment in lieu of notice. Employment ends immediately and the notice pay is paid as a lump sum. This is where treatment diverges.
Payment in lieu and why the UK legislated on it
For many years, a payment in lieu of notice that was not provided for in the contract could be argued to be damages for breach rather than earnings, and therefore to fall inside the tax free termination allowance. A great deal of structuring followed.
The United Kingdom closed this by requiring that the portion of any termination payment representing basic pay for the notice period is treated as earnings, whether or not the contract provides for it. The calculation, known as post employment notice pay, is mechanical and leaves little room for argument. The result is that the 30,000 pound exemption applies only to genuine compensation above notice pay. The wider severance picture is in redundancy pay and how much survives tax.
Ireland, the Netherlands and Germany reach broadly similar conclusions by different routes. Notice pay is pay.
What garden leave does to the rest of the package
Because you remain an employee, several things continue that would otherwise stop, and this is frequently worth more than the notice pay itself.
- Share vesting continues. Any tranche vesting during garden leave will normally vest. On a payment in lieu, employment ends and unvested equity is usually forfeited. For anyone with significant equity, this single point can decide which route to prefer. See RSUs and share options.
- Pension contributions continue. Both sides keep paying, and service accrues.
- Insurance cover continues. Life cover, income protection and private medical insurance remain in force, which matters more than people expect.
- Holiday continues to accrue, though most employers require it to be taken during the notice period, which is generally permitted.
Starting a new job during notice
Garden leave clauses almost always prohibit working elsewhere while still employed, and doing so anyway creates two simultaneous employments with the payroll problems described in taking a second job. Where the new employer is willing to wait, the overlap can be handled by agreement between the two companies, which is more common than people assume.
If you are moving country, the notice period also interacts with residence. Being paid by a former employer in one country while physically present in another raises questions about where that income is taxed, governed by the treaty employment article set out in the 183 day rule.
Two things to check in the contract
First, whether the employer has the right to require garden leave. If it does not, and it wants you out of the building, its only options are to pay in lieu or negotiate, which is a stronger position for you.
Second, how bonus is treated during notice. Many contracts require you to be employed and not under notice on the payment date. That clause has cost people very large sums and it is negotiable at the point of joining rather than at the point of leaving.
Related: Pilot Salary After Tax