Is garden leave pay taxed differently to normal salary?

Full answer

Garden leave is often confused with a genuine termination payment, but from a tax perspective it is treated completely differently, because the employment relationship has not actually ended. **What garden leave actually is** Garden leave is a period, usually during a notice period, where an employer instructs an employee not to attend work or carry out any duties (sometimes not to contact clients or colleagues either), while their employment contract, pay, and benefits continue exactly as normal. It is commonly used for senior staff or those with access to sensitive information, to keep them away from clients and competitors while their notice period runs down. **Why the tax treatment is straightforward** Because the employee remains employed throughout garden leave -- still receiving their normal contractual salary, still subject to PAYE, still accruing pension contributions, holiday and other benefits, and still bound by the terms of their employment contract (including confidentiality and, in many cases, restrictive covenants) -- there is no special tax treatment or exemption. The salary paid during garden leave is simply ordinary earnings, taxed and NI'd exactly as if the employee were attending work as normal. **Contrast with a genuine termination payment** This is very different from a payment made when employment has actually ended, such as a genuine redundancy or ex-gratia termination payment, which can potentially benefit from the separate £30,000 tax-free threshold for certain non-contractual termination payments. Garden leave pay cannot be structured to fall within this £30,000 exemption, because it is contractual salary paid during a period of continuing employment, not a payment made because employment has ended. **Payment In Lieu of Notice (PILON) is different again** Where an employer instead ends employment immediately and makes a Payment In Lieu of Notice (rather than requiring the employee to serve out notice on garden leave), the PILON itself is also always taxable as earnings in full since 2018 rules changed to close a previous loophole -- so in practice, garden leave pay and PILON now receive very similar tax treatment (both fully taxed as earnings), even though garden leave involves continuing employment and PILON involves ending it immediately. **Worked example** A finance director on £120,000 a year is asked to serve their 6-month notice period on garden leave following a decision to leave for a competitor. They continue to be paid their normal monthly salary of £10,000 gross throughout, taxed via PAYE in the normal way (40% higher rate applying above the basic rate band, plus 8% and 2% National Insurance as usual), with no special tax treatment or exemption despite not attending the office. If instead the employer terminates the contract immediately with a 6-month PILON of £60,000, that £60,000 is also fully taxable and subject to Class 1 NI as earnings under the post-2018 PILON rules. **Practical point** Employees on garden leave should also check whether their contract restricts the deduction of the garden leave period from any subsequent restrictive covenant enforcement period, and whether continued benefits (health insurance, company car) genuinely continue as normal, since these are contractual questions separate from the tax treatment.

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