Payment in lieu of notice (PILON) is a lump sum your employer pays you instead of requiring you to work through your notice period. Employment ends immediately on the date PILON is paid. The lump sum is the value of your salary and contractual benefits for the unworked notice. Since the 2018 reforms, PILON is fully taxable as earnings under PAYE plus National Insurance.
PILON is one of the three ways a UK notice period can resolve, alongside working notice and garden leave. The key difference is that PILON ends employment immediately. The notice period itself effectively disappears; the contractual entitlement to those weeks or months of salary is converted into a lump sum and paid out, and the employment relationship is over from the date of payment.
Whether the employer can use PILON unilaterally depends on the contract. Most modern contracts include an explicit PILON clause that gives the employer the right to pay PILON in lieu of working notice at their discretion. If your contract has that clause, the employer can decide on PILON without your agreement. If there's no clause, PILON requires mutual agreement; the employer can propose it and you can accept or refuse.
The arithmetic is straightforward. Your gross PILON equals your normal salary for the unworked notice period, plus any contractual elements your contract specifies as included (often pension contributions, sometimes contractual bonus, often not discretionary bonus). For someone on £3,000 gross per month with three months unworked, gross PILON is £9,000. The PILON calculator on this site handles the monthly-to-weekly conversions used in many schemes.
Tax is the part that's changed in the last decade. Before April 2018, contractual PILON was taxed as earnings but non-contractual PILON could sometimes fall within the £30,000 termination payment exemption. HMRC closed that loophole. All PILON is now treated as Post-Employment Notice Pay (PENP) and taxed as earnings, regardless of how it's structured. The £30,000 tax-free allowance only applies to genuine ex-gratia termination payments and statutory redundancy.
PILON timing has consequences. Restrictive covenants in your contract (non-compete, non-solicit, confidentiality) typically run from the date employment ends. Under PILON, employment ends on the payment date, so the covenants start counting from then. Compare this to garden leave, where employment ends only at the end of the notice period, so the covenants don't start until later. If you're moving to a competitor, PILON is generally the more favourable mode.
What PILON doesn't include matters. Accrued but untaken holiday is paid separately (and taxed separately, though also as earnings). Statutory redundancy pay (if you're being made redundant) is separate and tax-free up to £30,000. Outstanding contractual bonus may or may not be included depending on the scheme rules. Pension contributions for the PILON period may or may not continue depending on the scheme and the contractual wording.
From the employee's perspective, PILON is often welcome when you're moving to a new role and want to start as soon as possible. From the employer's perspective, PILON is welcome when they want a clean break without you remaining on the books or in the office. The two perspectives often align, which is why PILON is common in mid-senior departures, particularly competitive exits.
Practical recommendation: if your employer is offering PILON, get the figures and terms in writing before agreeing. Confirm the gross amount, the tax treatment, the inclusion or exclusion of bonus and benefits, and the leaving date. Use the PILON calculator to sanity-check the gross figure. Confirm the date that restrictive covenants start. If you're heading to a competitor, the date arithmetic is the most important number to lock down.
General information about UK employment law. For your specific situation, contact ACAS or an employment-law solicitor.