Answers · UK 2025/26

Is notice pay taxed the same as normal salary?

Yes -- whether you work your notice period as normal, or receive a Payment In Lieu of Notice (PILON), the payment is always taxed in full as ordinary earnings through PAYE, subject to Income Tax and both employee and employer National Insurance, following rules introduced in April 2018 that removed the previous ability to pay some PILONs tax-free.

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Full answer

Before April 2018, some employers could structure a Payment In Lieu of Notice so that it fell within the £30,000 tax-free termination payment threshold, provided the employment contract did not contain an express PILON clause -- this loophole was specifically closed, and the rules are now much simpler (if less generous). **The current rule -- Post-Employment Notice Pay (PENP)** Since 6 April 2018, all notice pay -- whether worked, or paid instead of working notice -- is treated as earnings and fully taxed and NI'd, regardless of whether the employment contract has an express PILON clause. HMRC calculates a specific figure called Post-Employment Notice Pay (PENP), broadly representing the basic pay the employee would have earned during any unworked part of their notice period, and this amount is always taxed as earnings, even if the wider settlement is otherwise partly tax-free. **How PENP is calculated** PENP is calculated using a statutory formula based on the employee's last full month or week's basic pay before termination, multiplied by the number of calendar days in the unworked notice period, divided by the number of days in the pay period used for the calculation -- basic pay only (excluding bonuses, commission, benefits in kind, and overtime) is used in the formula. **How it interacts with the wider termination payment** If the total termination payment package exceeds the calculated PENP figure, the excess above PENP can potentially qualify for the separate £30,000 tax-free threshold (assuming it is a genuine, non-contractual termination payment, not disguised notice pay) -- but the PENP amount itself is always carved out and taxed as earnings first, before the £30,000 threshold is applied to anything left over. **Worked example** An employee earning £4,000 gross basic monthly pay is dismissed with immediate effect, with 2 months of their 3-month notice period unworked. PENP is calculated as roughly £4,000 x 2 = £8,000 (using the simplified monthly formula), which is fully taxed as earnings with full Income Tax and Class 1 NI (both employee and employer). If the employer additionally pays a £20,000 ex-gratia termination payment on top, that £20,000 falls within the separate £30,000 threshold and is paid tax-free (assuming no other termination payments used up part of that threshold), since it is genuinely separate from, and in addition to, the PENP-taxed notice pay. **Why this matters practically** Employees negotiating a settlement should understand that notice pay/PILON will always be taxed regardless of clever contractual drafting -- the only genuinely tax-efficient element of a settlement is a true ex-gratia payment beyond PENP, up to the £30,000 threshold, so negotiations are often more productively focused on maximising that ex-gratia element rather than trying to reclassify notice pay. **Practical tip** Ask your employer or their HR/payroll team for the specific PENP calculation used in your case, since errors in identifying "basic pay" (for example, wrongly including a regular contractual allowance, or wrongly excluding it) can materially change how much of your settlement is taxed.