PILON is fully taxable as earnings since the Finance Act 2018. Income tax via PAYE and employee National Insurance both apply. The £30,000 tax-free termination allowance does NOT cover PILON; it's reserved for statutory redundancy and any ex-gratia portion.

Why does PILON look smaller after tax than I expected?

Because the full lump sum hits your monthly pay in a single payslip, it can push a slice into a higher tax band for that month. PAYE applies the calculation as if you'd be paid at that level every month. Over the full tax year your position usually reconciles, but the in-month deduction can look bigger than feels fair.

Can I put my PILON into a pension to save tax?

Sometimes, if your employer agrees. The PILON itself is paid as earnings, but you can use part of it to make a personal pension contribution and get income tax relief at your marginal rate. For higher earners, this can be a significant tax saving. Talk to your employer's payroll about whether they'll pay directly into your pension, which is cleaner.

How long should PILON money last?

Depends on your notice period and outgoings. Three months PILON for someone on £3,000/month gross is roughly £9,000 gross, perhaps £6,000-£6,500 net. At normal monthly spend, that covers 2-3 months. With a few sensible adjustments, you can stretch it to 4-5 months.

Managing Your PILON Payment (UK 2026)

Decision 1: check the tax

PILON is fully taxable as earnings, so income tax via PAYE and employee NI both apply. Your final payslip should show PILON as a separate line. Confirm the gross figure matches what the contract specified (use the PILON calculator to check), and that the deductions look roughly right for your marginal tax rate.

If the lump sum has pushed you temporarily into a higher tax band, your tax position usually reconciles over the full tax year via your tax code or self-assessment. If you’ve gone to a new role with a similar salary, this is self-correcting. If you’re going to a much lower- earning role or to no role, you may have overpaid and be due a refund through your tax code or Self Assessment.

Decision 2: top up the emergency fund

PILON is usually a one-off bolus of cash. The natural use is to extend your emergency fund. If your current emergency fund target was 3-6 months, the PILON often pushes that to 6-12 months in one move. Keep the bulk of it in a high-interest easy-access savings account.

The transfer worth setting up: a monthly standing order from the savings account to your current account, replacing what would have been salary. This rebuilds the salary-like rhythm and reduces the temptation to dip into the lump sum for non-essential spending. Choose an amount roughly equal to your essential monthly outgoings.

Decision 3: audit subscriptions and recurring costs

PILON is an unusual income event, which makes it a natural trigger for the audit you’ve been meaning to do. List every direct debit and standing order on the account. Cancel anything you haven’t deliberately used in the last 60 days. Renegotiate the mobile contract if it’s been rolling more than 18 months. Compare insurance and energy tariffs.

Most UK households find £150-£400 per month in this exercise. That’s 1-2 extra months of runway on a typical PILON package. The cuts that hurt least are the ones you weren’t using; the audit gets the easy savings first.

What not to do with PILON

The recurring mistakes: spending it on a lifestyle upgrade before the next income picture is clear (a holiday, a new car, a kitchen update), using it to pay down a low-interest mortgage (the money is more valuable as runway than as a small interest saving), treating it as “bonus money” rather than the months of salary it actually represents, and leaving it in a 0% current account where inflation erodes it.

If you’ve received PILON instead of working notice

The headline trade-off worth knowing: PILON ends your employment immediately. Your post-termination restrictions (non-compete, non-solicit, confidentiality) start running from the day PILON is paid, not from the original end-of- notice date. That’s usually favourable if you’re moving to a competitor. See PILON vs garden leave for the comparison.

Frequently asked questions

How is PILON taxed?: PILON is fully taxable as earnings since the Finance Act 2018. Income tax via PAYE and employee National Insurance both apply. The £30,000 tax-free termination allowance does NOT cover PILON; it's reserved for statutory redundancy and any ex-gratia portion.
Why does PILON look smaller after tax than I expected?: Because the full lump sum hits your monthly pay in a single payslip, it can push a slice into a higher tax band for that month. PAYE applies the calculation as if you'd be paid at that level every month. Over the full tax year your position usually reconciles, but the in-month deduction can look bigger than feels fair.
Can I put my PILON into a pension to save tax?: Sometimes, if your employer agrees. The PILON itself is paid as earnings, but you can use part of it to make a personal pension contribution and get income tax relief at your marginal rate. For higher earners, this can be a significant tax saving. Talk to your employer's payroll about whether they'll pay directly into your pension, which is cleaner.
How long should PILON money last?: Depends on your notice period and outgoings. Three months PILON for someone on £3,000/month gross is roughly £9,000 gross, perhaps £6,000-£6,500 net. At normal monthly spend, that covers 2-3 months. With a few sensible adjustments, you can stretch it to 4-5 months.

General information about PILON. For tax advice specific to your circumstances, contact HMRC or a chartered accountant.

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Managing your PILON payment