Yes. UK PILON (Payment in Lieu of Notice) is fully taxable as earnings. Since 6 April 2018, HMRC applies the Post-Employment Notice Pay (PENP) formula in section 402D ITEPA 2003 to every termination payment. Income tax and employee National Insurance are deducted through PAYE. The £30,000 tax-free termination allowance in section 403 does NOT apply to PILON.
PILON is a payment in lieu of the notice period. The employer pays a lump sum instead of requiring the employee to work notice. Historically the tax treatment depended on whether the PILON was contractual (chargeable as earnings under section 62 ITEPA 2003) or non-contractual (sometimes falling within the £30,000 termination allowance as damages). The Finance (No.2) Act 2017 closed the loophole with effect from 6 April 2018.
Since April 2018, HMRC applies the Post-Employment Notice Pay (PENP) formula to every termination payment. PENP catches any portion of a payment that represents unworked notice, whether or not the contract has a PILON clause. The formula is ((BP × D) ÷ P) − T, documented in section 402D ITEPA 2003 and HMRC's EIM13880.
PENP is chargeable to income tax as general earnings. It does NOT benefit from the £30,000 threshold in section 403 ITEPA 2003. Employee National Insurance is deducted through PAYE at the normal rates. Employer Class 1 NI (currently 15 per cent for 2025-26) is separately payable by the employer.
In practice, contractual PILON is usually paid as a separate line on the final payslip labelled as 'Payment in lieu of notice' or 'PILON'. It's taxed as earnings via PAYE in the pay period the payment is made. The lump sum can push you into a higher tax band for the month, though your annual tax position usually reconciles.
Non-contractual PILON (where the employer pays without a contractual right) attracts the same tax treatment via the PENP formula. The old advantage of calling PILON 'damages' to fall within £30,000 is closed. The only way to shelter payment for unworked notice from tax is to route it into a pension via employer contribution.
The PENP calculator on this site implements HMRC's formula exactly, including the negative-to-nil and total-termination-awards cap rules. Use it to check the employer's PILON tax treatment on your settlement letter. Common employer errors: using working days instead of calendar days, forgetting the 'T' variable, applying PENP after the £30k threshold instead of before.
For pension routing, employer contributions above the £30,000 threshold bypass both income tax and both employee and employer National Insurance. On senior packages this is often the single most valuable technique. Check with a specialist tax adviser before agreeing final settlement terms if the package is over £50,000 gross.
General information about UK employment law. For your specific situation, contact ACAS or an employment-law solicitor.