Answers · UK 2025/26

Is pay in lieu of notice taxed the same as normal salary?

Yes -- since April 2018, all payments in lieu of notice (PILON) are treated as fully taxable earnings and subject to both Income Tax and National Insurance, regardless of whether your contract contains a PILON clause. This closed a previous loophole that let some notice payments be paid tax-free as damages.

Last updated: 1 July 2026Last reviewed: 1 July 2026How we verify

Full answer

Before April 2018, the tax treatment of pay in lieu of notice depended heavily on whether the employment contract contained an explicit PILON clause, creating an inconsistent and often exploited distinction. That has now been simplified. **The current rule** All contractual and non-contractual PILON payments are now treated as earnings for both Income Tax and Class 1 National Insurance purposes, calculated using a specific statutory formula (the 'post-employment notice pay' or PENP calculation) based on the employee's basic pay and unworked notice period, regardless of whether the contract technically allowed the employer to make such a payment. **How this interacts with redundancy payments** A genuine redundancy payment (the statutory or any enhanced contractual redundancy element) can still benefit from the separate £30,000 tax-free exemption for termination payments, but the PILON element of a termination package must first be identified and taxed as earnings in full, BEFORE the £30,000 exemption is applied to the remaining genuinely non-contractual, non-PILON element. **Worked example** An employee is dismissed with a termination package of £40,000, including a calculated PENP of £8,000. The £8,000 PENP is taxed and NIC'd in full as earnings. The remaining £32,000 can potentially benefit from the £30,000 tax-free termination payment exemption, with the final £2,000 above that taxed (but not NIC'd, employer Class 1A NIC applies instead above £30,000 on the excess). **Practical tip** Ask your employer (or their HR/payroll team) for a clear breakdown of exactly how much of your termination package is PENP/PILON (fully taxed as earnings) versus genuine redundancy or compensation (potentially covered by the £30,000 exemption), since these are taxed very differently.