PENP Rules — Key Points for 2025/26
- Since April 2018, all PILON is taxable as employment income (income tax + NI)
- PENP = (basic monthly pay × months unworked) + benefits value
- Garden leave: fully taxable as salary — income tax and NI apply throughout
- NI rate on PENP: 8% employee, 13.8% employer
- Non-contractual ex-gratia above PENP may benefit from the £30,000 exemption
Notice Pay & PILON Tax Calculator
PENP calculation uses post-April 2018 rules. NI calculated at 8% flat for simplicity. Actual NI depends on annual earnings and thresholds. This calculator is for guidance only.
What is PENP and Why Does it Matter?
Post-Employment Notice Pay (PENP) is the amount of a termination payment that represents the basic pay the employee would have received had they worked their full notice period. HMRC introduced the PENP rules in April 2018 to close a loophole that had allowed employers to pay notice periods as tax-advantaged termination payments rather than as salary.
Before 2018, whether a PILON was contractual or non-contractual affected its tax treatment. Non-contractual PILON could potentially fall within the £30,000 termination payment exemption. The PENP rules ended that distinction. Now, all payments representing the notice period are treated as employment income, subject to both income tax and National Insurance, regardless of what they are called in the settlement or contract.
PENP is calculated as the basic monthly pay multiplied by the number of months of notice not worked, plus the value of benefits that would have been received during that period. Only genuine ex-gratia payments above and beyond PENP — such as compensation for claims waived in a settlement agreement — can potentially benefit from the £30,000 tax-free threshold.
PILON vs Garden Leave: Tax Comparison
Garden leave and PILON produce the same gross pay for the same notice period, and since 2018 both attract full income tax and National Insurance. However, there are practical differences that can affect the net financial outcome.
During garden leave, non-cash benefits such as company cars and private medical cover typically continue. These have a cash equivalent value that would not be replicated in a PILON. For employees with significant benefit packages, garden leave can be financially more favourable than PILON, even though the salary element is taxed identically.
PILON provides immediate certainty and frees the employee to start new employment. Garden leave keeps the employment relationship alive and may include restrictions on working for competitors. The right choice depends on individual circumstances, contract terms, and whether finding new work quickly is a priority.
| Feature | PILON | Garden Leave |
|---|---|---|
| Tax treatment | Income tax + NI via PENP | Income tax + NI as salary |
| Benefits continue | No (cash equivalent in PENP) | Yes (usually) |
| Can start new job | Immediately | Only after notice ends |
| Restrictions apply | After payment | During leave period |
Non-Contractual Bonuses and the £30,000 Threshold
A non-contractual bonus paid as part of a termination package is employment income and fully taxable. It does not benefit from the £30,000 threshold. However, genuine ex-gratia compensation — paid as part of a settlement agreement to settle employment claims — can benefit from the threshold, provided it is not part of PENP and properly documented as a termination payment rather than as deferred earnings.
In practice, settlement agreements should clearly separate PENP elements (taxable as earnings), accrued holiday (taxable as earnings), and genuine ex-gratia elements (potentially within the £30,000 threshold). Getting this drafting wrong can result in unexpected tax liabilities for the employee or PAYE obligations for the employer.
Frequently Asked Questions
What is PENP?
Post-Employment Notice Pay. It is the part of a termination payment representing basic pay for the unworked notice period. Since April 2018 it is fully taxable as employment income including NI.
Is PILON always taxable?
Yes. Since April 2018, all PILON within PENP is taxable as employment income. There is no longer a distinction between contractual and non-contractual PILON for tax purposes.
Is garden leave taxable?
Yes. Garden leave is ordinary employment income. You remain employed, continue to receive salary and benefits, and full income tax and NI apply throughout.
Do you pay NI on PILON?
Yes. PENP attracts both income tax and employee National Insurance at standard rates. For 2025/26 the main employee NI rate is 8% between the primary threshold and upper earnings limit.
Can any part of PILON be tax-free?
The PENP element cannot be tax-free. Only genuine ex-gratia amounts above PENP forming part of a termination payment can benefit from the £30,000 threshold.
What counts as benefits for PENP?
Company cars, private health insurance, life assurance, and other non-cash benefits that would have been received during the unworked notice period. Their P11D cash equivalent value is included in PENP.
What is the PENP formula?
PENP = (basic monthly pay × unworked months) + benefits value for unworked period. Non-contractual bonuses are taxable separately as earnings.
How does garden leave compare financially to PILON?
Gross pay is the same for the same period. Garden leave preserves benefits which may exceed their cash equivalent in PILON. PILON frees you to start new work immediately, which can increase total earnings.
What is the difference between contractual and non-contractual PILON now?
Since April 2018 there is effectively no difference for tax. Both are taxable as employment income under PENP rules.
Can I split my PILON across two tax years to save tax?
If payment timing allows it, splitting across tax years can keep income within lower bands and reduce total tax. However PAYE timing rules and HMRC anti-avoidance provisions may limit this in practice.
Does my employer pay NI on my PILON?
Yes. Employers pay Class 1 NI at 13.8% on PENP amounts, the same as on regular salary. This is a cost to the employer on top of the gross payment to you.
What if my contract has no PILON clause?
Since 2018, the absence of a PILON clause no longer changes the tax treatment. The PENP rules apply regardless of whether the contract included an express PILON provision.