How does your notice period affect your final pay when leaving a job?

Full answer

When you resign or are dismissed, your notice period and final pay calculation involve several moving parts that are worth understanding before your last day. **Working your notice** If you work your full notice period, you continue to receive your normal salary and benefits as usual, taxed through PAYE exactly as before -- there is nothing special about the tax treatment of ordinary salary paid during a notice period. **Statutory minimum notice** By law, an employee must give at least one week's notice after one month's service, and an employer must give at least one week's notice per complete year of service, up to a maximum of 12 weeks after 12 years' service -- though your contract may specify longer notice periods than these statutory minimums, in which case the contractual notice period applies. **Payment in Lieu of Notice (PILON)** If your employer chooses to end your employment immediately rather than have you work your notice, and pays you a lump sum instead, this is a Payment in Lieu of Notice (PILON). Since April 2018, all PILON payments are fully taxable and subject to Income Tax and National Insurance as if it were ordinary salary, regardless of whether your contract had a specific PILON clause -- the old distinction that allowed some PILON to be tax-free was abolished. **Accrued but untaken holiday** Any statutory or contractual holiday you have accrued but not yet taken must be paid out in your final payslip, calculated pro-rata based on how much of the holiday year has elapsed. This holiday pay is taxed as normal earnings, not as a special termination payment. **Worked example** James, on £45,000/year, resigns with one month's contractual notice. He works his full notice, so his final month's pay is a normal 1/12th of his salary (£3,750), taxed normally. He also has 4 days of accrued but untaken holiday, paid out at his daily rate (£45,000 ÷ 260 working days x 4 days = approximately £692), added to his final payslip and taxed as ordinary income. **Genuine redundancy payments** If you are leaving due to redundancy rather than resignation, a separate statutory or enhanced redundancy payment may apply, and the first £30,000 of a genuine redundancy payment (not salary or PILON) can be paid tax-free, with the excess taxed as income. This is a distinct calculation from notice pay and holiday pay. **Overpaid or underpaid tax** Because a final payslip often includes irregular elements (backdated pay, bonus, holiday pay, PILON), your tax code may not calculate the exact right amount of tax for the year. Any overpayment is normally reconciled automatically by HMRC after the tax year ends, or you can check and reclaim it sooner using the P800 process or your Personal Tax Account.

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