Payment in lieu of notice, almost always shortened to PILON, is when your employer ends your contract immediately and pays you a lump sum equivalent to the notice you would have worked. Instead of being employed for another month or three, you stop being employed today and the money for the unworked notice lands in your bank account.
For the employee, PILON usually feels like the best of the three exit modes: you’re free to start somewhere else immediately, no more awkward last-day chats with people who already know you’re leaving, and the money is sitting in your account rather than spread across the next few payslips. But there are wrinkles, especially around tax, and whether PILON is even available depends entirely on what your contract says.
When does PILON actually apply?
Three things have to line up for PILON to happen.
First, your contract has to allow it. Most modern UK employment contracts contain a PILON clause that gives the employer the right to terminate with payment instead of requiring you to work your notice. If your contract has no PILON clause, your employer can still offer PILON, but they can’t insist on it, and you can’t insist on it either. It becomes a mutual negotiation rather than a contractual right.
Second, the employer has to choose to use it. Even where the clause exists, employers don’t always invoke it. They’re more likely to where you’re moving to a competitor, where you handle sensitive information, or where having you around the office during your notice would be awkward (after a dispute, for example).
Third, you have to accept it. In practice, almost everyone does. PILON is usually a better outcome for the employee than working the notice, with one significant exception that we’ll come to under tax.
How PILON is calculated
The starting point is your normal weekly or monthly pay, multiplied by the number of weeks or months of notice you would have worked. Three months of notice on a £60,000 salary gives a PILON of roughly £15,000 (£5,000 per month, three months unworked).
What else gets included on top of the base salary varies by contract. Some PILON clauses include only basic pay. Others include the cash value of benefits you would have received during the notice period, such as pension contributions, private medical insurance, company car allowance, and sometimes target bonus pro-rated. Read your contract.
If your contract is silent on what PILON covers, the courts will usually interpret it as covering everything you would have received during the notice period, not just basic salary. So if your employer offers you PILON as base only and you have a meaningful benefits package, it’s worth pushing back.
The tax position (the bit people get wrong)
Until 2018, PILON had a complicated tax position where payments could sometimes be made tax-free if structured correctly. That’s no longer the case.
Since April 2018, all PILON payments are fully taxable as earnings. Both income tax and National Insurance contributions are deducted by your employer through PAYE. The amount that hits your bank account is the gross figure minus income tax at your marginal rate, minus 8% employee NI on the bit above the primary threshold, minus 2% employee NI on the bit above the upper earnings limit.
The £30,000 tax-free element you may have heard about applies to statutory redundancy pay and some other ex gratia termination payments. It does not apply to PILON. A PILON of £15,000 is taxed in full; you’ll typically net around £8,500-£10,000 from a £15,000 gross PILON depending on your other income for the tax year.
One practical implication: if you’re close to a tax-band boundary, taking PILON at the wrong moment in the tax year can push you into a higher band on the whole payment. If you’re going to negotiate the timing of PILON at all, do it with this in mind. If you can defer the payment to a new tax year, you might net a meaningful amount more.
PILON vs working your notice vs garden leave
You can’t always choose between these, but it’s worth understanding the trade-off.
Working your notice gets you paid normally via PAYE, with full tax efficiency. You’re still in the office, still doing handover, still gathering experience and relationships you can use later. The downside: you can’t start the new job until your last day.
Garden leave keeps you on the payroll under the same tax treatment as working your notice, but you stay at home. Your restrictive covenants (non-compete, non-solicit) run from the end of your employment, so they start later than if you took PILON. This is significant if you’re going to a competitor.
PILON ends the employment immediately and gets you the lump sum. The tax is worse than the other two options (especially on the NI side), but you start the new role faster and your post-termination restrictions start ticking down sooner.
The comparison table on the home page lays the three side by side.
Common gotchas with PILON
Benefits stopping immediately. Once your employment ends, private medical insurance, life cover, and any other employer-provided benefits stop. If you’re mid-treatment under the medical insurance, this matters. Ask for the cash equivalent to be included in the PILON if possible, and look into a personal policy to bridge the gap.
Pension contributions. Your employer’s pension contributions stop on the day employment ends. PILON doesn’t usually count as pensionable pay, so you lose the contributions you would have received during the notice period unless the PILON clause specifically includes them. Worth checking the scheme rules.
Bonus. If you have a bonus expected during the notice period, PILON may or may not include it. Most PILON clauses specifically exclude bonus payments. If the bonus is significant (a financial-services year-end, for example), this can make working your notice substantially more valuable than taking PILON.
Restrictive covenants. A common employer tactic is to offer PILON to start the non-compete clock as early as possible, especially if you’re going to a competitor. A 6-month non-compete after a 3-month garden leave keeps you out of the market for 9 months. The same 6-month non-compete after PILON keeps you out for 6 months (it starts at termination). Worth modelling this carefully before agreeing.
How to negotiate PILON if your contract doesn’t require it
If your contract has no PILON clause and you’d like to leave faster, you’re effectively asking for a mutual variation of the contract. Here’s what tends to work.
Frame the conversation around what your employer gets. If they put you on garden leave, they pay your full salary for months while you do nothing. PILON sometimes works out cheaper for them, especially if they were planning to backfill quickly. Lead with that.
Be specific about what you’d give in return. A clean handover document by the end of week one, an introduction to your successor for key clients, availability by email for a couple of weeks after you leave. Concrete offers move conversations faster than vague ones.
Have the conversation in writing, even if you’ve discussed it verbally. PILON involves real money and real tax; you want a written record of what was agreed.
What to do if you think you’re owed PILON
Common scenarios where someone might be owed PILON they haven’t received: a redundancy where the employer terminates without notice but only pays statutory redundancy, or a dismissal where notice wasn’t given and PILON wasn’t paid. If your contract has a PILON clause and you were terminated without notice, the PILON should be paid.
The first step is always a polite letter or email to your ex-employer setting out what you believe is owed and asking for it. Most disputes resolve at this stage. If they don’t, the next step is ACAS early conciliation, which is free. After conciliation, an employment tribunal claim is possible, though the time limits are tight (usually 3 months from the date the payment should have been made).
The summary
PILON gets you out faster and gives you the money up front, but it’s fully taxable and tends to start your post-termination restrictions ticking sooner. Whether it’s the right choice depends on what your contract says, what you’re moving to, and where you are in the tax year. Read the PILON clause carefully before signing or accepting an offer that uses it.
For the wider picture of how PILON fits into the resignation process, see the complete UK resignation guide. For how it compares to garden leave specifically, see the garden leave guide.
This is general information, not legal or tax advice. The tax treatment of termination payments has specific rules and your circumstances may change the calculation. For significant sums, take advice from a chartered accountant or an employment-law solicitor.