Is PILON taxed in the UK?

Yes. Since April 2018, PILON (payment in lieu of notice) is always taxed as earnings, regardless of whether the contract has an express PILON clause. The change was introduced by the Finance (No. 2) Act 2017, which inserted the PENP (Post-Employment Notice Pay) rules into chapter 3 of part 6 of ITEPA 2003. PILON is taxed through PAYE at your marginal rate plus employee and employer National Insurance.

Post-Employment Notice Pay. It is the formula HMRC uses to work out the part of any termination payment that is treated as earnings (taxed in full) rather than redundancy compensation (potentially tax-free up to £30,000). The formula takes the basic pay you would have received during your notice period and treats that as earnings, regardless of how the employer labels the payment.

Does the £30,000 redundancy tax-free allowance apply to PILON?

No. The £30,000 tax-free allowance under section 403 of ITEPA 2003 applies to redundancy compensation and ex-gratia payments. PILON is always treated as earnings under the PENP rules and is therefore fully taxed regardless of any allowance. The £30,000 covers what is left after PILON, statutory redundancy and any other earnings components are stripped out.

How do I work out the PILON tax on a settlement?

Three steps. First, calculate the basic pay for the unworked notice period (PENP). That figure is taxed in full as earnings. Second, deduct PENP from the total termination payment. Third, the remainder includes any statutory redundancy, ex-gratia and other elements that may benefit from the £30,000 tax-free allowance. The PILON calculator on this site does the first step in seconds.

PILON Tax UK (2026): How Payment in Lieu of Notice Is Taxed

The pre-2018 position

Before April 2018, the tax treatment of PILON depended on whether the contract had a PILON clause:

Express PILON clause: the payment was treated as contractual earnings and taxed in full through PAYE.
No express clause: the payment was often treated as damages for breach of contract and could fall within the £30,000 tax-free allowance.

The distinction created an unfair asymmetry: two employees in identical situations could face very different tax bills depending solely on the accident of contract drafting. HMRC closed this loophole in 2018.

The 2018 PENP rules

The Finance (No. 2) Act 2017 inserted new sections 402A to 402E into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The new rules apply from 6 April 2018 and create the concept of Post-Employment Notice Pay (PENP).

The core rule: any termination payment, however described, is treated as earnings up to the value of the basic pay for the unworked notice period. The rest of the termination payment may then qualify for the £30,000 tax-free allowance.

The PENP formula

PENP = ((BP × D) ÷ P) − T

Where:

BP = basic pay for the last pay period before termination.
D = number of days in the unworked notice period.
P = number of days in the relevant pay period.
T = any amounts of the termination payment that are already taxed as earnings under other rules.

The formula produces a figure that represents the equivalent of basic pay for the unworked notice. That figure is taxed in full as earnings, regardless of how the employer structures the payment.

Worked example 1: monthly paid, three-month PILON

Employee earning £4,000 gross monthly basic pay. Three months of notice paid as PILON. No bonus or variable elements.

BP = £4,000 (one month basic pay)
D = 90 (days in three months of unworked notice)
P = 30 (days in the last pay period)
T = 0
PENP = ((4,000 × 90) ÷ 30) − 0 = £12,000

£12,000 is taxed as earnings through PAYE at the marginal rate plus NI on both sides. No part of this £12,000 falls within the £30,000 tax-free allowance.

If the total termination payment was (say) £45,000 including statutory redundancy and ex-gratia, the remaining £33,000 is the redundancy and ex-gratia portion. £30,000 of that is tax-free; the extra £3,000 is taxed as earnings.

Worked example 2: salary plus monthly bonus

Employee earning £5,000 monthly basic plus £1,500 monthly contractual commission. One month of PILON.

PENP uses basic pay only. So BP = £5,000. PENP = ((5,000 × 30) ÷ 30) − 0 = £5,000. The £5,000 is taxed as earnings under PENP.

The £1,500 commission for the unworked notice period (which the employee would have earned had they worked) is typically paid separately and taxed as earnings under the standard PAYE rules regardless of PENP. See PILON and bonus payments for the detail.

Worked example 3: PILON in a redundancy package

Employee earning £3,500 monthly basic. Made redundant with three months of PILON, £8,000 statutory redundancy, and £12,000 ex-gratia. Total package £30,500.

PENP = (3,500 × 90) ÷ 30 = £10,500 (taxed as earnings)
Statutory redundancy: £8,000 (tax-free under £30,000 allowance)
Ex-gratia: £12,000 (tax-free under £30,000 allowance, subject to total cap)
Total tax-free element: £8,000 + £12,000 = £20,000 (within £30,000 cap)
Total tax: PAYE on £10,500 plus £0 on the redundancy and ex-gratia

National Insurance on PILON

PILON attracts both employee and employer National Insurance at the standard rates. This is in addition to income tax. For 2025/26 (subject to confirmation each tax year):

Employee NI: 8% on the band between £12,570 and £50,270, plus 2% above £50,270.
Employer NI: 13.8% on the full PILON value above the secondary threshold.

Some employers gross up the PILON to cover the employee’s tax and NI; most do not. Read your settlement letter carefully to confirm whether figures quoted are gross or net.

Settlement agreements and PILON

Most settlement agreements involving a redundancy package will identify the PILON element separately and tax it through PAYE. The settlement letter should set out:

The gross PILON figure.
The tax and NI deductions applied.
The net PILON figure.
The remainder of the package and its tax treatment.

If the settlement letter is unclear, ask your solicitor (or HR) to break it down before signing. See what is a settlement agreement? and the settlement agreement calculator for the framework.

Useful calculators

PILON calculator — gross PILON figure for any pay and notice length.
Redundancy tax estimator — net figure for a full redundancy package.
Settlement agreement calculator
Final pay estimator

Related guides

Frequently asked questions

Is PILON taxed in the UK?: Yes. Since April 2018, PILON (payment in lieu of notice) is always taxed as earnings, regardless of whether the contract has an express PILON clause. The change was introduced by the Finance (No. 2) Act 2017, which inserted the PENP (Post-Employment Notice Pay) rules into chapter 3 of part 6 of ITEPA 2003. PILON is taxed through PAYE at your marginal rate plus employee and employer National Insurance.
What is PENP?: Post-Employment Notice Pay. It is the formula HMRC uses to work out the part of any termination payment that is treated as earnings (taxed in full) rather than redundancy compensation (potentially tax-free up to £30,000). The formula takes the basic pay you would have received during your notice period and treats that as earnings, regardless of how the employer labels the payment.
Does the £30,000 redundancy tax-free allowance apply to PILON?: No. The £30,000 tax-free allowance under section 403 of ITEPA 2003 applies to redundancy compensation and ex-gratia payments. PILON is always treated as earnings under the PENP rules and is therefore fully taxed regardless of any allowance. The £30,000 covers what is left after PILON, statutory redundancy and any other earnings components are stripped out.
How do I work out the PILON tax on a settlement?: Three steps. First, calculate the basic pay for the unworked notice period (PENP). That figure is taxed in full as earnings. Second, deduct PENP from the total termination payment. Third, the remainder includes any statutory redundancy, ex-gratia and other elements that may benefit from the £30,000 tax-free allowance. The PILON calculator on this site does the first step in seconds.

General information about UK PILON tax, not personal tax advice. The PENP rules interact with personal circumstances (other income, pension contributions, tax codes). For a binding figure on your specific situation, take advice from an accountant or the firm handling your settlement.