Does PILON include bonus?

Only the basic pay portion under the PENP formula. Bonus and commission are not part of basic pay and so are not part of the PILON calculation. They are paid separately as earnings under the standard PAYE rules. Whether bonus is owed at all on termination depends on the contract: contractual bonuses earned to the termination date are usually payable, discretionary bonuses are at the employer's discretion.

What counts as basic pay for PILON?

The amount the employee would have received as basic salary in the pay period before termination, before tax and NI. Excludes bonus, commission, overtime, shift allowances, expense reimbursement and benefits in kind. The narrow definition is deliberate; HMRC wanted a simple, predictable formula that does not require the employer to model variable pay.

Is contractual commission earned during the unworked notice payable?

Often yes, depending on the contract. If the commission accrues on work completed (which most do), it is owed up to the date of termination. If it accrues on sales credited (more common in financial services), the date the sale is credited matters, not the date the customer pays. Read the commission scheme carefully.

Are discretionary bonuses payable on termination?

Almost never. The defining feature of a discretionary bonus is that the employer can choose whether to pay it. Termination is the moment they usually choose not to. Some discretionary schemes have express terms that pay out a pro-rated amount on termination; most do not. Read the scheme rules and the contract.

PILON and Bonus Payments (UK 2026): How Bonus Interacts With PILON

Why bonus is separate from PILON

The PENP rules (Post-Employment Notice Pay, in chapter 3 of part 6 of ITEPA 2003) define PILON as a function of basic pay, not total earnings. The formula is:

PENP = ((BP × D) ÷ P) − T

Where BP is “basic pay” for the last pay period before termination. Basic pay specifically excludes:

Bonus and commission.
Overtime payments.
Shift allowances.
Expense reimbursements.
Benefits in kind.
Variable allowances of any kind.

The narrow definition is deliberate. HMRC designed PENP to be a predictable, formulaic calculation that does not require the employer to model variable pay. The trade-off is that any variable pay legitimately owed has to be handled separately.

Contractual vs discretionary bonus

The single most important distinction. A contractual bonus is one the employee is entitled to under the contract once the conditions are met. A discretionary bonus is one the employer can choose whether to pay even when the conditions are met.

The difference matters because:

Contractual bonuses are payable on termination to the extent they have been earned to that date.
Discretionary bonuses are almost never payable on termination, because the employer can decline.

The wording of the scheme decides the category. Phrases like “the employee shall be entitled to a bonus of...” signal contractual. Phrases like “the employer may at its discretion pay a bonus of up to...” signal discretionary.

How contractual bonus is calculated on termination

Most contractual bonus schemes specify how the bonus is calculated. Common patterns:

Time-based. Pro-rated to the date of termination. If the annual bonus is £6,000 and the employee leaves four months into the bonus year, they get £2,000.

Performance-based. Calculated on performance against targets to the termination date. The targets are pro-rated, the achievement is assessed, the bonus is paid.

Sales-credit-based. Common in financial services and commission-driven roles. The commission accrues on sales credited before the termination date. Sales credited after, even if generated by the departing employee, are not paid.

The scheme rules in your contract or policy document are the source of truth. Where the scheme is silent on termination treatment, the courts have generally treated contractual bonuses as payable to the extent earned, but this is not automatic.

The “good leaver / bad leaver” rule

Many UK bonus and equity schemes distinguish between “good leavers” (redundancy, ill-health, retirement) and “bad leavers” (resignation, dismissal for misconduct).

Good leavers usually keep their accrued bonus and equity entitlement. Bad leavers usually lose it. The distinction matters most for medium-to-senior roles where unvested equity may be substantial.

The definitions of “good leaver” and “bad leaver” are in the scheme rules. Some schemes are restrictive (only redundancy or retirement counts as good); some are generous (anything short of misconduct counts as good). Read the rules.

Worked example: salary plus monthly commission

Employee earning £5,000 monthly basic plus £1,500 average monthly contractual commission. Resigns with three months of PILON.

PENP = ((5,000 × 90) ÷ 30) − 0 = £15,000.
Commission earned to the termination date but not yet paid: £1,500 (the prior month) plus the pro-rated portion of the current month. Say £2,250 total.
Total final pay: £15,000 PILON + £2,250 commission + accrued holiday + statutory final pay items. All taxed as earnings through PAYE.

Commission for sales credited after the termination date is not payable even if the employee generated them. The contract ended with the PILON.

Worked example: annual contractual bonus

Employee on £60,000 salary with a contractual annual bonus of 15% paid in March each year. Bonus year runs January to December. Made redundant on 30 September with three months of PILON.

PENP = ((5,000 × 90) ÷ 30) − 0 = £15,000.
Pro-rated bonus: (273 / 365) × £9,000 = £6,729 (rounded).
Total earnings paid as part of the final settlement: £15,000 PILON + £6,729 bonus + holiday + any other final pay items.

The bonus is taxed as earnings through PAYE in the same way as the PILON. Neither benefits from the £30,000 tax-free allowance.

Worked example: discretionary annual bonus

Same facts as above, but the bonus is discretionary rather than contractual.

PENP = £15,000 (same as above).
Bonus: at the employer’s discretion. Most employers do not pay discretionary bonus on redundancy or resignation. Some offer a goodwill payment as part of an exit settlement.

Where a discretionary bonus would otherwise have been paid, the employee can sometimes negotiate it into the settlement agreement (often as ex-gratia compensation, which can benefit from the £30,000 tax-free allowance). Take settlement advice.

Worked example: equity / share options

Employee with 500 vested share options at £10 strike and 1,500 unvested share options. Made redundant with three months of PILON.

Vested options can usually be exercised within a defined window after termination (commonly 90 days). The tax treatment varies by scheme (EMI, CSOP, unapproved); take accounting advice before exercising.

Unvested options usually lapse unless the scheme has a good-leaver clause. Some schemes accelerate vesting on redundancy; most do not. Read the scheme rules.

Tax treatment of bonus on termination

All bonus payments made on termination are taxed as earnings through PAYE:

Income tax at the marginal rate.
Employee NI (8% on the band, 2% above).
Employer NI (13.8% on the value).

No part of a bonus payment falls within the £30,000 tax-free allowance under section 403 of ITEPA 2003, because bonus is treated as earnings, not as termination compensation. For the tax detail, see PILON tax and redundancy pay tax explained.

Settlement agreements and bonus

Where bonus is in dispute, settlement agreements often resolve it through a single ex-gratia payment that may benefit from the £30,000 tax-free allowance if structured carefully. The settlement letter should be clear on:

The gross bonus figure (taxed as earnings).
Any ex-gratia element (may benefit from the £30,000 allowance).
The tax and NI deductions applied.

See what is a settlement agreement? for the broader settlement framework.

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Frequently asked questions

Does PILON include bonus?: Only the basic pay portion under the PENP formula. Bonus and commission are not part of basic pay and so are not part of the PILON calculation. They are paid separately as earnings under the standard PAYE rules. Whether bonus is owed at all on termination depends on the contract: contractual bonuses earned to the termination date are usually payable, discretionary bonuses are at the employer's discretion.
What counts as basic pay for PILON?: The amount the employee would have received as basic salary in the pay period before termination, before tax and NI. Excludes bonus, commission, overtime, shift allowances, expense reimbursement and benefits in kind. The narrow definition is deliberate; HMRC wanted a simple, predictable formula that does not require the employer to model variable pay.
Is contractual commission earned during the unworked notice payable?: Often yes, depending on the contract. If the commission accrues on work completed (which most do), it is owed up to the date of termination. If it accrues on sales credited (more common in financial services), the date the sale is credited matters, not the date the customer pays. Read the commission scheme carefully.
Are discretionary bonuses payable on termination?: Almost never. The defining feature of a discretionary bonus is that the employer can choose whether to pay it. Termination is the moment they usually choose not to. Some discretionary schemes have express terms that pay out a pro-rated amount on termination; most do not. Read the scheme rules and the contract.

General information about UK PILON and bonus interaction. Specific treatment depends on your contract, bonus scheme and the facts. For a binding figure or scheme interpretation, take advice from a solicitor or accountant.