Is payment in lieu of notice (PILON) taxable in the UK?

Full answer

PILON is the money an employer pays instead of making you work your notice period. Tax treatment used to depend on whether the payment was contractual, but since April 2018 the rules apply to everyone. Employers must calculate Post-Employment Notice Pay (PENP) - broadly the basic pay you would have earned during the unworked notice - and tax that amount as ordinary earnings. So PILON is subject to Income Tax at your marginal rate (20%, 40% or 45% for 2026/27, or the Scottish bands) and to employee Class 1 NI at 8% up to GBP 50,270 and 2% above. It does not eat into the GBP 30,000 tax-free allowance that applies to genuine redundancy and other termination payments. Worked example: you earn GBP 4,000 a month and are paid two months' PILON of GBP 8,000. The full GBP 8,000 is added to your taxable pay. A higher-rate taxpayer pays 40% Income Tax (GBP 3,200) plus 2% NI (GBP 160), leaving GBP 4,640. A basic-rate taxpayer pays 20% (GBP 1,600) plus 8% NI (GBP 640), leaving GBP 5,760. By contrast, a separate genuine redundancy payment can use the first GBP 30,000 tax-free, with any excess taxed but NI-free. The PENP calculation can be complex where pay varies or notice is part-worked, so check your payslip and contract carefully. The 2026/27 thresholds and rates are frozen, so the band your PILON falls into depends on your total earnings for the year, including the termination month. Use the take-home pay calculator to see the net figure after Income Tax and NI on your PILON.

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