What is the difference between working my notice and PILON?

Full answer

When an employment relationship ends, whether by resignation, dismissal, or redundancy, the way the notice period is handled -- actually worked, or paid in lieu -- has different practical and tax consequences worth understanding. **Working your notice** This is the default position: after notice is given (by either the employer or employee), the employee continues to attend work and perform their normal duties for the length of the notice period (whether the statutory minimum or a longer contractual notice period, whichever is greater), receiving their normal salary and benefits throughout, before employment formally ends at the end of that period. **PILON -- Payment In Lieu Of Notice** PILON means the employer ends the employment relationship immediately (or on an agreed earlier date), without requiring the employee to work through the notice period at all, but pays a lump sum broadly equivalent to the salary (and, depending on the clause, sometimes benefits) the employee would have received had they worked the full notice period. **PILON must be contractually provided for (or agreed) to be lawful** An employer can only lawfully use PILON without the employee's specific agreement if the employment contract contains an express PILON clause allowing the employer to do this -- without such a clause, an employer simply not requiring the employee to work their notice while withholding pay, or ending employment immediately without paying for the notice period, could constitute a breach of contract (sometimes called "wrongful dismissal"), even if the employer intends the payment as a rough equivalent. **Garden leave -- a different option again** A third option, distinct from both working normally and PILON, is "garden leave" -- where the employee remains formally employed and continues to be paid and bound by their contractual obligations (including confidentiality and non-compete restrictions) throughout the notice period, but is not required or permitted to actually attend work or perform duties. This is often used when an employer wants to keep an employee away from clients, sensitive information, or colleagues during a notice period, particularly if they're leaving for a competitor. **Tax treatment differs** PILON payments are subject to Income Tax and National Insurance in the same way as normal earnings would be (this was clarified and standardised by rules introduced from April 2018, which specifically ensure that PILON can't be used to convert what would otherwise be taxable notice pay into a tax-free termination payment) -- this differs from certain other elements of a termination payment (such as a genuine redundancy payment or compensation for loss of employment beyond contractual notice) which can benefit from the separate £30,000 tax exemption. Getting this distinction right matters significantly for the overall tax treatment of a termination package. **Why the distinction matters for employees** From the employee's perspective, PILON means an immediate clean break (which can be helpful if you've already secured a new role and want to start sooner, or simply want to move on quickly), whereas working the notice period keeps you employed (and therefore still building continuous service, accruing holiday, and covered by employment protections) for longer. Garden leave sits in between -- you remain employed and are paid, but don't need to physically work, though your restrictive covenants typically remain fully in force throughout. **Checking your specific contract** Whether your employer can require or offer PILON, and exactly how it will be calculated (base salary only, or including other elements such as bonus, benefits, or pension contributions), depends entirely on the specific wording of your employment contract -- always check for an express PILON clause, and if you're unsure how your termination package has been calculated, ask for a clear written breakdown. **Practical tip** If you're negotiating an exit or have been offered a termination package, check carefully whether the notice element is being treated as PILON (fully taxable) or is genuinely a separate redundancy or compensation payment (potentially eligible for the £30,000 exemption), since the labelling and structuring of a termination package can have a meaningful effect on how much you actually receive after tax.

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