The two calculation questions
Two distinct calculations happen when PILON is paid:
- Gross PILON - the amount the employer owes the employee. Set by the contract or by mutual agreement in a settlement.
- PENP (post-employment notice pay) - the HMRC formula that determines how much of the payment is taxed as earnings vs how much falls within the £30,000 termination allowance.
Gross PILON is the employer's liability; PENP is HMRC's taxable-amount rule. They usually produce the same number for a simple contractual PILON, but they can diverge for complex packages.
The basic PILON formula
For most contractual PILON, the formula is straightforward:
PILON = basic weekly (or monthly) pay x weeks (or months) of unworked notice
What counts as basic pay depends on the contract. Most contracts define it as gross basic salary excluding overtime, bonuses, commission and benefits. Some senior contracts include the value of pension, private medical insurance and car allowance in the PILON base.
Where the contract is silent, tribunals default to gross basic salary at the leaving date.
Worked example 1 - monthly-paid employee
An employee earns £42,000 gross basic salary, paid monthly. Contractual notice is 3 months. Employer exercises PILON.
| Step | Calculation | Result |
|---|---|---|
| 1. Monthly basic pay | £42,000 / 12 | £3,500 |
| 2. Notice length in months | 3 | 3 months |
| 3. Gross PILON | £3,500 x 3 | £10,500 |
| 4. Income tax (BR 20%) | Approx | -£2,100 |
| 5. Employee NI (12%) | Approx | -£1,260 |
| 6. Net PILON | Approx | £7,140 |
PENP = £10,500 (full amount). None of the £30,000 s.401 allowance is available because contractual PILON is fully taxed regardless.
Worked example 2 - weekly-paid employee
An employee earns £520 gross basic weekly pay. Contractual notice is 4 weeks. Employer exercises PILON.
| Step | Calculation | Result |
|---|---|---|
| 1. Weekly basic pay | Given | £520 |
| 2. Notice length in weeks | 4 | 4 weeks |
| 3. Gross PILON | £520 x 4 | £2,080 |
| 4. Income tax (BR 20%) | Approx | -£416 |
| 5. Employee NI (12%) | Approx | -£250 |
| 6. Net PILON | Approx | £1,414 |
The PENP formula in detail
PENP is set by section 402D Income Tax (Earnings and Pensions) Act 2003. The formula for a payment that follows employment ending:
PENP = ((BP x D) / P) - T
Where:
- BP = basic pay in the last pay period ending before the trigger date (usually the effective date of termination).
- D = number of unworked notice days.
- P = number of days in the last pay period (usually 30 or 31 for monthly, 7 for weekly).
- T = amount already treated as earnings in the termination payment (e.g. contractual bonus).
For most simple monthly-paid employees, BP/P x D gives roughly the same figure as the gross PILON calculation above. HMRC guidance and the PILON calculator handle the edge cases.
Worked example 3 - senior with variable pay
Senior employee on £8,000 gross monthly basic + £2,000 monthly car allowance + 8% pension. Contractual PILON clause covers basic pay only. Notice is 6 months.
| Component | Included in PILON? | 6-month value |
|---|---|---|
| Basic pay (£8,000/month) | Yes - contract says basic only | £48,000 |
| Car allowance (£2,000/month) | No - excluded by contract | - |
| Employer pension (£640/month) | No - paid into scheme separately if contract requires | - |
| Bonus (discretionary) | No - discretionary lost on resignation | - |
| Gross PILON | - | £48,000 |
Senior employees can lose significant value by taking PILON on basic-only definitions. Where possible, negotiate PILON to include the value of pension, car allowance and any accrued bonus - or take garden leave instead, which preserves all benefits for the notice period.
PILON and mid-year pay changes
Where basic pay has changed mid-year (pay rise, promotion, demotion), the PENP formula uses the last completed pay period before termination. This can produce quirky outcomes:
- Pay rise last month: PENP is calculated on the new higher rate.
- Reduced hours last month: PENP is calculated on the reduced rate, potentially lower than the historical earnings the employee expects.
- Zero pay in the last pay period (unpaid leave, sabbatical, sickness beyond SSP): PENP calculation gets complex, HMRC guidance applies.
The PILON calculator handles the standard cases; complex situations warrant specialist advice.
Interaction with holiday pay and bonus
PILON is separate from accrued holiday pay and accrued bonus:
- Accrued but untaken statutory holiday must be paid out separately in the final pay run under the Working Time Regulations 1998.
- Accrued contractual bonus (pro-rata to leaving date) is payable if the scheme rules require it.
- Both are taxed as earnings in the normal way, not under PENP.
Some employers try to bundle holiday and bonus into PILON to simplify accounting. Employees should insist on separate calculation and separate payslip lines - the two entitlements are distinct in law and treating them together can obscure underpayments.
Common calculation errors
- Using net pay instead of gross. PILON is always calculated on gross basic pay.
- Excluding a contractual pay rise. If a pay rise was contractually due but not paid, the PILON base is the correct rate not the historical rate.
- Confusing PILON with PENP. They are different questions - PILON is the employer's liability, PENP is HMRC's taxable amount.
- Failing to apply notice-related contractual increases. Some contracts increase the notice period after a defined service anniversary; the PILON base uses the correct notice length as at the trigger date.
- Missing accrued holiday and bonus. Both are separate from PILON and both must be paid.
Useful calculators
- PILON calculator
- Notice period calculator
- Final pay estimator
- Holiday entitlement calculator
- Redundancy pay calculator
Related guides
- PILON tax
- PILON and holiday pay
- PILON and bonus payments
- PILON examples
- PILON explained
- PILON pension contributions
Authority pages
Frequently asked questions
- How do I calculate my PILON?
- Multiply gross basic weekly or monthly pay by the number of unworked notice weeks or months. That is the gross PILON. Income tax and employee NI are deducted in the normal way. Use the PILON calculator to model your figures with employer NI and PENP applied.
- What is PENP?
- Post-employment notice pay - the HMRC formula introduced in April 2018 for taxing termination payments. Any part of a termination payment attributable to unworked notice is fully taxable as earnings under PENP, regardless of whether the contract has a PILON clause. Formula: (BP x D) / P where BP is basic pay in the last pay period, D is unworked notice days, P is days in the last pay period.
- Does PILON include bonus and commission?
- Only if the contract or scheme rules specify. Most standard PILON clauses cover basic pay only. Some senior contracts include the value of contractual benefits (pension, car allowance, private medical). Discretionary bonuses are almost always lost on resignation.
- Does PILON include holiday pay?
- No. Accrued but untaken holiday must be paid out separately in the final pay run under the Working Time Regulations 1998. Some employers try to bundle the two - insist on separate calculation and separate payslip lines.
- How much notice does PILON cover?
- The unworked portion of the notice period as at the effective date of termination. If you have already worked 2 weeks of a 12-week notice period, PILON covers the remaining 10 weeks. The unworked notice is measured from the actual last working day to the notified end date.
Sources and further reading
- Income Tax (Earnings and Pensions) Act 2003, section 402D — PENP - the primary PILON tax rule since April 2018.
- HMRC EIM13874 - PILON and termination payments — HMRC guidance on PILON tax treatment.
- GOV.UK: Payment when leaving a job — Government guidance on final pay including PILON.
- ACAS: Final pay — Free, impartial guidance on final pay.
- Working Time Regulations 1998 — Statutory holiday and holiday pay on termination.
General information about UK PILON and termination pay, not personal tax or legal advice. For your situation take advice from HMRC, ACAS or an employment-law solicitor.