Answers · UK 2025/26
Is payment in lieu of notice (PILON) subject to income tax and NI?
Yes -- since April 2018, all payments in lieu of notice (PILON) are fully subject to income tax and National Insurance, regardless of whether the employment contract includes a PILON clause. The employer must calculate Post-Employment Notice Pay (PENP) and deduct tax and NI through PAYE. The previous £30,000 tax-free exemption does not apply to PILON.
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Payment in lieu of notice (PILON) is a payment made to an employee when the employer ends employment immediately rather than requiring the employee to work out their notice period. **Current rules (from April 2018)** Since 6 April 2018, all PILON is taxable as employment income. HMRC introduced the "Post-Employment Notice Pay" (PENP) rules to end the previous practice of using the £30,000 termination payment exemption to shelter PILON from tax. **PENP formula** HMRC requires employers to calculate PENP using this formula: PENP = (BP x D) ÷ P Where: - BP = basic pay per pay period - D = number of days in the notice period not worked - P = number of days in the last pay period PENP is always taxable and subject to NI. The PENP amount is ring-fenced from the £30,000 termination exemption. **Worked example** Sarah is dismissed immediately on 1 June 2026. She has a 3-month notice period. Monthly salary: £5,000. PENP = £5,000 x 3 months = £15,000 This £15,000 PILON is subject to income tax and NI in the normal way, deducted through PAYE. If Sarah also receives a separate discretionary termination payment of £30,000, that £30,000 can potentially benefit from the £30,000 tax-free termination exemption (minus any other exempt amounts used). **What the £30,000 exemption covers** The £30,000 termination exemption still applies to other termination payments such as: - Statutory redundancy pay (the portion above the weekly cap) - Ex gratia payments - Injury to feelings awards But it does NOT apply to PILON. **Garden leave vs PILON** If an employee is placed on garden leave (remains employed but does not work during the notice period), that pay is always fully taxable -- it is ordinary salary. The PILON rules apply when the employment is terminated immediately rather than the employee serving notice.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.