Payment in lieu of notice (PILON) is a lump-sum payment made when an employer terminates employment immediately rather than requiring the employee to work their notice period. Since 6 April 2018, all PILON is fully taxable as Post-Employment Notice Pay (PENP) under Income Tax (Earnings and Pensions) Act 2003, sections 402D–402G — income tax and Class 1 National Insurance apply in full. The £30,000 termination payment exemption does not apply to PILON. This treatment applies regardless of whether the employment contract contains a PILON clause. Updated June 2026.
Source: Income Tax (Earnings and Pensions) Act 2003, s.402D–402G; Employment Rights Act 1996, s.86; acas.org.uk/notice-periods.
What the law says
The statutory notice entitlement is set out in Employment Rights Act 1996, sections 86–91. An employee with at least one month's service is entitled to a minimum notice period of one week per year of service (minimum one week, maximum 12 weeks). If the employer chooses not to require the employee to work this notice, they must pay in lieu of it.
The tax treatment of PILON changed fundamentally from 6 April 2018 when Finance (No. 2) Act 2017 introduced the Post-Employment Notice Pay (PENP) rules. Before that date, whether PILON was taxable depended on whether the contract included a PILON clause. Since April 2018, the distinction is irrelevant — PENP is always taxable as employment income. Source: gov.uk/termination-payments-and-tax-when-you-leave-a-job.
What is PENP and how is it calculated
PENP — Post-Employment Notice Pay — is the statutory formula used to identify the taxable portion of a termination payment that relates to unworked notice.
The HMRC formula:
PENP = (BP × D) ÷ P
Where:
- BP = the employee's basic pay in the last pay period before the termination date
- D = the number of calendar days in the unworked notice period (the contractual or statutory notice period minus any notice actually worked)
- P = the number of calendar days in the last pay period
The resulting PENP figure is treated as employment income, subject to income tax and both employee and employer Class 1 NICs.
Source: ITEPA 2003, s.402E; gov.uk/hmrc-internal-manuals/employment-income-manual.
The £30,000 exemption and PILON
Many workers facing redundancy receive a termination package that includes both a statutory redundancy payment and a PILON. Understanding how the £30,000 exemption interacts with PILON is important:
| Element of termination package | Tax treatment |
|---|---|
| PENP (the PILON amount) | Taxable as earnings — income tax and NIC apply in full |
| Statutory redundancy pay | Exempt from tax and NIC up to £30,000 |
| Ex-gratia payment (above statutory) | Falls within £30,000 exemption (if total with SRP does not exceed £30,000) |
| Amount above £30,000 (redundancy + ex-gratia combined) | Subject to income tax; employer NIC applies from April 2020 |
The PENP is calculated and taxed first. The remaining elements of the termination package — statutory redundancy pay and any ex-gratia element — then benefit from the £30,000 exemption under ITEPA 2003, s.403.
Practical example: An employee receives a £5,000 PILON, £3,000 statutory redundancy pay, and £2,000 ex-gratia. The £5,000 PILON is taxed as earnings in full. The £3,000 redundancy and £2,000 ex-gratia (£5,000 combined) are within the £30,000 limit and are tax-free.
Source: ITEPA 2003, s.402D–403; acas.org.uk/notice-periods.
PILON and your statutory redundancy pay
If you are being made redundant and receiving both a statutory redundancy payment and a PILON, the PILON does not reduce your entitlement to statutory redundancy pay. Redundancy pay is calculated separately on age, years of service (capped at 20), and weekly pay (capped at £751 from 6 April 2026). Use the free statutory redundancy pay calculator to check your entitlement.
PILON and garden leave: key differences
PILON and garden leave both result in the employee receiving pay for a notice period without working it — but they are legally and practically different:
Garden leave:
- Employment continues throughout the notice period.
- The employee receives normal salary as earned income.
- Benefits and entitlements (pension, accruing annual leave, etc.) continue.
- The employee is still bound by their employment contract, including any restrictive covenants.
PILON:
- Employment ends on the date of dismissal or resignation.
- The employer pays a lump sum in lieu of the notice period.
- The employee is free to start a new job immediately.
- The PENP rules apply to the tax treatment.
For more on garden leave rights and pay, see the separate garden leave guide.
Calculate your notice period
Use the free statutory notice period calculator to calculate the statutory notice entitlement relevant to your PILON calculation. For individual advice on PILON in a specific situation, contact ACAS or an employment solicitor.
Frequently asked questions
See the FAQ below. For specific advice on termination payment tax treatment, consult an employment solicitor or tax adviser — the PENP calculation in complex cases requires professional input. ACAS guidance is at acas.org.uk/notice-periods.
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