Answers · UK 2025/26

How does Post-Employment Notice Pay (PENP) get taxed?

Post-Employment Notice Pay (PENP) is the portion of a termination payment that represents pay you would have earned during your notice period if you had worked it, and it is always fully taxable as earnings (subject to Income Tax and both employee and employer National Insurance) — it cannot benefit from the £30,000 termination payment tax exemption, unlike genuine compensation for loss of employment.

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When an employee's employment ends and they receive a termination payment without working their full contractual notice period (commonly because the employer pays them in lieu of notice, or PILON), HMRC requires the employer to calculate a specific figure called Post-Employment Notice Pay (PENP) using a set statutory formula, broadly based on the employee's basic pay, their unworked notice period, and any notice already worked or paid separately. The purpose of PENP is to identify and separate out the portion of the overall termination payment that is really just standard earnings the employee would have received anyway if they had worked their notice — this portion is always fully subject to Income Tax and National Insurance (both employee and employer contributions) exactly as normal salary would be, because it is legally classified as earnings from employment, not compensation for the loss of the job itself. This matters because it is only the remaining, non-PENP portion of a termination payment — genuine compensation for loss of office, redundancy pay above the £30,000 threshold for certain elements, or damages for unfair dismissal — that can potentially benefit from the £30,000 tax-free termination payment exemption (and unlimited employee National Isurance exemption, though employer Class 1A National Insurance still applies above £30,000 on the non-PENP element). For example, if an employee with one month's unworked notice and a termination payment of £40,000 has a calculated PENP of £4,000 (representing that month's pay), the £4,000 is taxed as ordinary earnings in full, while the remaining £36,000 is tested against the £30,000 exemption — meaning £30,000 of that remaining amount is tax-free, and only £6,000 is taxed (at the employee's marginal Income Tax rate, with employer-only Class 1A NI due on it, but no employee NI). PENP calculations can be complex, particularly where notice pay, garden leave, or contractual PILON clauses interact, so employees receiving a significant termination payment should ask their employer (or a tax adviser) for a clear breakdown of how much has been treated as PENP versus how much falls within the £30,000 exemption. Use the Redundancy Pay and Income Tax calculators to estimate your likely net position.