What is Post-Employment Notice Pay (PENP) and how is it calculated for termination payments?

Full answer

PENP was introduced to stop employers structuring termination payments to avoid tax simply by calling what is effectively notice pay something else, such as an "ex gratia" payment, and it applies a set formula to identify the taxable notice-pay element of any termination settlement. **Why PENP exists** Before PENP rules were introduced, some employers structured payments in lieu of notice as tax-free "ex gratia" payments under the £30,000 termination payment exemption, even though the payment was, in substance, simply notice pay -- PENP closes this by requiring a specific calculation of the notice-pay element regardless of how the payment is described in the settlement documentation. **The PENP formula** The basic PENP formula is: (Basic Pay for the last full pay period before notice was given, divided by the number of days in that pay period, multiplied by the number of calendar days in the unworked notice period) minus any contractual payment in lieu of notice already taxed as earnings. The resulting figure is the amount treated as PENP, and it is always subject to Income Tax and National Insurance as if it were ordinary earnings. **Worked example** An employee with a monthly basic salary of £4,000 (paid monthly, so the last pay period has, say, 30 days) is dismissed with immediate effect and given a termination payment, but is entitled to a three-month (91-day) statutory and contractual notice period which they do not work. PENP is calculated as £4,000 / 30 x 91 = £12,133 (rounded). This £12,133 is taxed as normal earnings (Income Tax and NI both apply), regardless of how the wider settlement payment is labelled in the agreement. **What happens to the remainder of the settlement** If the total termination payment is, for example, £45,000, and PENP is calculated as £12,133, the remaining £32,867 can potentially benefit from the £30,000 termination payment tax exemption (covering redundancy-type and other qualifying termination payments), meaning £30,000 of that remainder is tax-free and only £2,867 above that is taxed (Income Tax only, no employee NI, though employer NI can apply to amounts above £30,000 under separate rules) -- illustrating how PENP and the £30,000 exemption interact as two separate steps in the same overall calculation. **Only unworked notice matters** PENP is only relevant to the extent notice is NOT worked; if an employee works their full notice period and is paid normally throughout, there is no PENP calculation needed, since their notice pay is simply ordinary taxed salary as usual -- PENP specifically targets payments made in place of notice the employee did not actually work. **Why this catches out badly drafted settlement agreements** A settlement agreement that describes a payment purely as "compensation for loss of employment" without correctly carving out and separately taxing the PENP element can still be challenged by HMRC, since the tax treatment depends on the substance of the calculation, not the label used in the paperwork -- getting professional payroll or tax advice when structuring a termination settlement is important precisely because of this. **Practical tip** If you are negotiating a termination settlement and are not working your full notice period, ask for (or independently check) the PENP calculation, since this portion will always be taxed as earnings regardless of how the rest of the settlement is described, and only genuine amounts above PENP can potentially benefit from the £30,000 tax-free termination payment exemption.

Try the calculator

More answers

• How much statutory notice am I entitled to based on my length of service?
• Is payment in lieu of notice (PILON) subject to income tax and NI?