PILON clause

Why this matters right now

Post-2018 PENP tax alignment removed the historical tax advantage of non-contractual PILON. But the contractual PILON clause still matters commercially - it gives the employer a legal right to end employment immediately in exchange for the lump sum, which affects restrictive covenant timing, benefit continuation, and negotiation leverage on exit packages.

What a PILON clause typically covers

A well-drafted PILON clause specifies:

• The employer's right to pay in lieu of all or part of the notice.
• Whether the amount is basic pay only, or includes contractual benefits.
• Treatment of accrued but untaken holiday (usually separate).
• Treatment of pension contributions.
• Treatment of bonus (contractual vs discretionary).
• Effective date of termination when PILON is exercised.

Contractual vs non-contractual PILON

Case example: PILON clause absence limited employer options

A senior manager with a 6-month contractual notice period resigned to join a competitor. The employer wanted to end employment immediately to trigger restrictive covenants but the contract had no PILON clause. Employer could not lawfully pay in lieu without the employee's agreement. Options: (a) require full 6 months working notice, (b) place on garden leave (also required contractual clause - present here), or (c) negotiate PILON by agreement. Ultimately used garden leave for 6 months, with £120,000 salary continuing throughout. The lesson: no PILON clause = less employer flexibility, potentially more favourable to the employee.

Tax treatment - PENP

Since April 2018, section 402D Income Tax (Earnings and Pensions) Act 2003 imposes the Post-Employment Notice Pay formula on all termination payments. Any portion of a termination payment attributable to unworked notice is fully taxable as earnings, regardless of PILON clause status.

PENP formula: (BP × 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.

The £30,000 termination-payment allowance (section 401 ITEPA 2003) does NOT shelter PILON. See PILON tax and how is PILON calculated.

What to check in your contract

1. Is there a PILON clause? If yes, read the specific wording.
2. What base does the PILON apply to - basic pay only, or basic + benefits + pension?
3. Is the clause employer-only, or can either side invoke it?
4. Does PILON trigger immediate termination or a defined future date?
5. How does PILON interact with restrictive covenants (start of restriction)?
6. What happens to accrued holiday, bonus and pension?

Negotiation at offer stage

For senior roles being negotiated:

• Consider whether a PILON clause is in your interest (immediate exit if things go wrong) or against it (employer can dispose of you quickly).
• If included, negotiate the base to include benefits value, not just basic.
• Negotiate pension continuation on PILON amount.
• Negotiate restrictive-covenant credit for PILON period.
• Consider mutual-invocation right (either side can trigger).

PILON on exit — practical checks

1. Confirm the effective date of termination in writing.
2. Verify the PILON base matches the contract clause.
3. Check accrued holiday paid separately (not bundled).
4. Check contractual bonus accrued to termination date.
5. Verify pension contributions on the PILON base if applicable.
6. Confirm restrictive-covenant start date.
7. Request itemised final payslip showing each component.

When PILON is bundled into settlement agreement

Settlement agreements often include PILON as one component of a larger package. Points to check:

• PILON should be identified separately, not lumped into the ex gratia figure.
• PILON is taxed as earnings; ex gratia falls within £30k allowance.
• Misclassification (calling PILON "ex gratia") can create HMRC risk for both sides.
• Legal fees are usually paid by the employer (£500-£1,500+VAT).

Useful calculators

• PILON calculator
• Notice period calculator
• Final pay estimator
• Holiday entitlement calculator
• Settlement agreement calculator

Related guides

• PILON tax
• How is PILON calculated
• How is PILON paid
• PILON pension contributions
• PILON vs garden leave

Authority pages

• Employment rights hub
• Notice period rights UK
• Redundancy rights UK
• Employment tribunal UK

Frequently asked questions

What is a PILON clause?

A contractual clause allowing the employer to pay the notice period as a lump sum instead of requiring the employee to work it. Employment ends immediately when PILON is paid. Since April 2018, all PILON is fully taxable as earnings under the PENP rules.

Is PILON always taxable?

Yes since April 2018. Section 402D Income Tax (Earnings and Pensions) Act 2003 imposes the PENP formula on all termination payments attributable to unworked notice. Fully taxable as earnings with income tax and employee NI deducted.

Can my employer force PILON on me?

Only if the contract has an express PILON clause. Without one, PILON requires the employee's agreement. Where a clause exists and is exercised, employment ends immediately on the PILON payment date.

Does PILON include pension contributions?

Contractual PILON on basic pay usually carries pension contributions for auto-enrolled workers. Non-contractual PILON usually does not. See PILON pension contributions for the detail. Since 2018 all PILON is fully taxable so pension routing has become an increasingly valuable planning lever.

How does PILON affect restrictive covenants?

Restrictive covenants usually run from the effective date of termination. PILON accelerates that date to the PILON payment date, so covenants start running sooner. Well-drafted contracts express the credit explicitly.

General information about UK employment law, not legal advice. For your situation, contact ACAS or an employment-law solicitor.