Is PILON always taxable?

Since April 2018, all payments in lieu of notice are subject to income tax and National Insurance Contributions (NICs) under the Post-Employment Notice Pay (PENP) rules. PILON is taxable whether or not your employment contract includes a PILON clause. The PENP rules replaced the old exemption that applied to contractual PILON where no express clause existed. Both employer and employee NICs apply to PILON payments.

Does my employer pay NIC on PILON?

Yes. Since April 2018, employers must pay Class 1 secondary NICs on PILON (the PENP element). The employer NIC rate is 15% (from April 2025) on the PILON amount above the secondary threshold (£96 per week / £5,008 per year for 2026/27). Employee Class 1 NICs also apply at 8% on weekly earnings between £242 and £967, and 2% above £967. This significantly increased the cost of PILON payments for employers.

What is the difference between PILON and garden leave?

Garden leave means you remain employed during your notice period, receiving full salary and benefits, but are asked not to attend work. PILON is a cash payment made instead of requiring you to work or remain on garden leave. Key differences: during garden leave you continue to accrue pension rights and benefits; PILON ends employment immediately. Garden leave payments are always fully taxable. PILON is also fully taxable under PENP rules. Both are subject to income tax and NICs.

Can PILON be included in a settlement agreement?

Yes, PILON is frequently included within a broader settlement agreement. When included in a settlement, the PILON element must be separately identified and taxed accordingly — it cannot shelter under the £30,000 tax-free exemption. Only genuine ex gratia compensation elements (not PILON, not statutory or enhanced redundancy above £30,000) can benefit from the £30,000 exemption. Your employer should provide a clear breakdown showing which elements are PILON and which are compensation.

How is PILON calculated if I work part-time?

PILON for part-time workers is calculated on the same basis as full-time workers — proportional to contracted hours and pay. The PENP formula uses your actual basic pay in the last pay period before the termination trigger date. If you work 20 hours per week at £15/hr, your basic weekly pay is £300. Multiply by notice weeks to get gross PILON. Tax and NICs then apply to the PENP amount in the normal way. Holiday pay accrued but untaken is calculated separately and is also taxable.

PILON Calculator — Payment in Lieu of Notice Tax 2026

Q: What is the PENP formula?

PENP (Post-Employment Notice Pay) = (BP × D/P) − T. Where BP is basic pay in the last pay period before the trigger date, D is the number of days in the post-employment notice period, P is the number of days in the last pay period, and T is any taxable amounts already paid during the notice period. PENP represents the minimum taxable element of any termination payment. Any amount above PENP within the first £30,000 may be tax-free as a redundancy payment.

Last updated: March 2026

PILON Tax Calculator 2026/27

Calculate your post-employment notice pay (PENP), tax and NIC deductions and net PILON payment

Basic Weekly Pay (£) Gross basic pay per week before tax (no overtime/bonuses)

Notice Period (weeks)

Other Contractual Payments (£) Holiday pay, car allowance etc. paid alongside PILON

Tax Rate

PILON Tax Rates 2026/27

Income Tax Bands

Taxable Income Band	Rate	Notes
Up to £12,570	0%	Personal allowance
£12,571 – £50,270	20%	Basic rate
£50,271 – £125,140	40%	Higher rate
Over £125,140	45%	Additional rate

Employee NICs 2026/27

Weekly Earnings	NIC Rate
Up to £242/wk (£12,570/yr)	0%
£242 – £967/wk (£50,270/yr)	8%
Over £967/wk	2%

Key Rule: Since 6 April 2018, all PILON is taxable as Post-Employment Notice Pay (PENP) regardless of whether your contract contains a PILON clause. Both income tax and Class 1 NICs apply.

The Complete Guide to PILON Tax in the UK 2026

Payment in lieu of notice (PILON) is a lump sum paid to an employee instead of requiring them to work through their notice period. Since the Finance (No.2) Act 2017 reformed the rules from April 2018, PILON has been subject to income tax and National Insurance Contributions regardless of the terms of your employment contract. Understanding the Post-Employment Notice Pay (PENP) rules is essential for anyone negotiating a departure from employment.

What is the PENP Formula?

PENP stands for Post-Employment Notice Pay. It is calculated using a statutory formula prescribed by ITEPA 2003 s.402D:

PENP = (BP × D / P) − T

BP = Basic pay in the last pay period before the trigger date
D = Number of days in the post-employment notice period
P = Number of days in the last pay period (e.g. 7 for weekly, ~30 for monthly)
T = Taxable amounts already paid during the notice period

The PENP amount is always subject to income tax and Class 1 NICs. Any termination payment above PENP may benefit from the £30,000 exemption — but only if it is a genuine redundancy or ex gratia payment, not a contractual entitlement.

Exempt Versus Taxable Elements of Termination Payments

Not all termination payments are treated identically. HMRC distinguishes carefully between different components:

Payment Type	Tax Treatment	NIC Treatment
PILON (PENP element)	Fully taxable as employment income	Class 1 NICs apply
Statutory Redundancy Pay	Exempt up to £30,000	No NICs
Enhanced Redundancy Pay	Exempt within £30,000 band	No NICs on exempt element
Ex Gratia (genuine)	Exempt within £30,000 band	No NICs on exempt element
Holiday Pay (accrued)	Fully taxable	Class 1 NICs apply
Injury to Feelings (SOSR)	Potentially exempt	No NICs if exempt

The PENP amount is effectively the taxable floor — the minimum amount of any termination payment that must be taxed. If your total PILON exceeds your PENP, the excess may qualify for the £30,000 exemption if structured correctly as a compensation payment.

Employer NIC on PILON Payments

From April 2018, employers must pay Class 1 secondary NICs on the PENP element of any termination payment. The employer NIC rate from April 2025 is 15% on PILON above the secondary threshold (£5,008 per year / £96 per week). This is in addition to the employee's NIC deduction.

For a £20,000 PILON payment to a basic rate taxpayer: income tax of £4,000 (20%), employee NIC of approximately £1,600 (8%), and employer NIC of approximately £2,249 (15%) on top. The employer's NIC cost is real — it represents a meaningful additional cost to the business beyond the headline PILON figure and is a key negotiating lever in settlement discussions.

PILON vs Redundancy: Key Differences

Many employees conflate PILON with redundancy pay, but they are legally distinct:

PILON compensates for the notice period not worked. It is always taxable as earnings.
Redundancy pay (statutory or enhanced) is compensation for losing your job. Up to £30,000 is tax-free.
You can receive both — PILON for notice and redundancy pay for the job loss — and the two are calculated independently.
The statutory redundancy pay cap is £643 per week (2026/27) for a maximum of 20 years' service.
Notice periods accumulate separately: the statutory minimum is 1 week per year of service (up to 12 weeks).

Negotiating PILON: Practical Tips

Understanding the tax rules gives you a stronger negotiating position:

Push for the highest ex gratia element — amounts above PENP that qualify as genuine compensation can be sheltered within the £30,000 exemption.
Clarify the breakdown — always request a written schedule showing PILON, redundancy, ex gratia and other elements separately. HMRC requires clear documentation.
Consider outplacement and other benefits — some employer-funded outplacement support and retraining (up to £30,000) can be tax-free and is a cost-effective negotiation tool.
Pension contributions — ask whether your employer can make a contribution to your pension from termination payments. Employer pension contributions are not subject to NICs.
Timing matters — if your payment will push you into a higher tax band for the year, discuss whether it can be structured across tax years (though HMRC is alert to artificial deferral).

Worked Example: £30,000 PILON

Scenario: Sophie earns £42,000/year (£3,500/month basic, £807.69/week) and has a 12-week notice period. She is being made redundant. Her employer offers a £30,000 PILON.

PENP = (£3,500 × 84 days / 30 days) = £9,800 (taxable as earnings)
Remaining £20,200 = treated as redundancy/ex gratia (within £30,000 tax-free band)
Tax on PENP: £9,800 × 20% = £1,960
Employee NIC on PENP: approximately £784
Net PILON: approx £27,256

Note: actual NIC depends on annualisation and other earnings in the year.

HMRC Guidance and Reporting

Employers must report PILON through Real Time Information (RTI) payroll on or before the payment date. PILON must be included on the P45 as part of final pay. If additional payments are made after the P45 is issued, these are reported via an Earlier Year Update (EYU) or on a P11D if benefits-in-kind. HMRC's guidance on termination payments is in the Employment Income Manual at EIM12970 onwards. Employees who believe PAYE has been incorrectly deducted can reclaim through self-assessment or by contacting HMRC.

Sources & Methodology

This calculator uses 2026/27 HMRC income tax rates and National Insurance rates. PENP is calculated using the statutory formula in ITEPA 2003 s.402D. All calculations assume the PILON constitutes the full PENP amount (no amounts already paid during notice).

Disclaimer: This calculator provides estimates for guidance only. Tax and NIC on PILON depends on total earnings in the tax year, your tax code and other factors. Consult an employment solicitor or tax adviser for your specific situation.

UK Calculator Editorial Team

Our calculators are maintained by qualified accountants and employment law specialists. All tools use official HMRC and legislation.gov.uk data. Learn more about our team.

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