How is notice pay taxed when leaving a job in the UK?

Full answer

Notice pay is one of the most commonly misunderstood elements of a termination package, often wrongly assumed to share the same tax-free treatment as genuine redundancy compensation. **Notice pay is always fully taxable** Whether you work your notice period as normal (receiving your usual salary, taxed normally) or receive a lump sum payment in lieu of notice (PILON) instead of working it, this amount is treated as earnings and is fully subject to Income Tax and National Insurance -- there is no special exemption for notice pay itself, regardless of how it is structured. **Post-Employment Notice Pay (PENP) rules** Since April 2018, specific rules require ALL termination payments to be analysed to identify the "Post-Employment Notice Pay" element -- broadly, the amount equivalent to what you would have earned if you had worked your full notice period -- and this PENP amount must be taxed as earnings (full Income Tax and NI) regardless of how the employer chooses to label or structure the overall termination payment. **Why this closed a previous loophole** Before these rules, some employers structured termination payments to characterise notice-period-equivalent amounts as tax-free "compensation" rather than taxable notice pay, potentially avoiding tax on money that was functionally equivalent to working notice -- the PENP rules were introduced specifically to prevent this, ensuring the notice-equivalent portion is always taxed as earnings. **What can still be tax-free** Only the genuinely COMPENSATORY element of a termination payment -- beyond the notice pay/PENP amount -- can potentially benefit from the separate £30,000 tax-free exemption available for genuine redundancy or termination compensation, and even that exemption only applies up to £30,000 combined across all qualifying elements. **Worked example** Someone with a three-month notice period is made redundant and receives a termination payment structured as: 3 months' PILON (equivalent to what they would have earned working notice) plus additional redundancy compensation. The PILON portion is fully taxed as earnings (Income Tax and NI). The additional redundancy compensation portion, if genuinely compensatory rather than notice-related, can use the £30,000 tax-free exemption (subject to the overall £30,000 cap across the whole payment). **Garden leave is different** If you are placed on "garden leave" (still formally employed, but not required to attend work) for your notice period rather than receiving a lump sum PILON, you continue to be paid your normal salary as usual through payroll, taxed in exactly the same way as regular earnings -- this is functionally similar in tax terms to a PILON, just paid over time rather than as a lump sum. **Practical tip** Ask your employer or HR department for a clear breakdown of how your termination payment is split between PENP/notice pay (fully taxable) and any genuinely compensatory redundancy element (potentially eligible for the £30,000 exemption), since this breakdown directly affects your total tax liability and take-home amount from the payment.

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