Pay in Lieu of Notice — How It's Taxed in the UK for 2026/27
Why payment in lieu of notice (PILON) is fully taxable and NIable in the UK, unlike some other elements of a leaving package, for 2026/27.
Why PILON Rules Changed
Before April 2018, the tax treatment of payment in lieu of notice depended heavily on the specific wording of an employment contract — a PILON clause existed or it didn't, and structuring could sometimes reduce the tax and NI due. Rules introduced from April 2018 removed this distinction: all PILON is now treated as fully taxable earnings, subject to Income Tax and Class 1 National Insurance in the normal way, whether or not the contract contains an explicit PILON clause. This significantly simplified (and, for employees, generally increased) the tax due on notice pay compared to some older arrangements.
PILON vs the Redundancy Exemption
| Element of a leaving package | Tax treatment |
|---|---|
| Payment in lieu of notice (PILON) | Fully taxable and NIable, like normal salary |
| Genuine redundancy compensation, up to £30,000 | Income Tax exempt |
| Genuine redundancy compensation, above £30,000 | Income Tax due on the excess; employer NI due on the excess |
| Statutory or enhanced redundancy pay within the exemption | Income Tax exempt up to £30,000 combined limit |
A leaving package often bundles several elements together — notice pay, redundancy compensation, perhaps a payment for unused holiday — and it's important not to assume the whole lump sum benefits from the £30,000 exemption. PILON specifically sits outside that exemption and is taxed in full regardless of size, while the genuine redundancy compensation element is what benefits from the £30,000 threshold.
Working Notice vs Being Paid in Lieu
If your employer asks you to work through your full notice period, you're simply paid as normal for that time — there's no separate PILON tax question, because you haven't actually left employment yet during that period. PILON becomes relevant specifically when an employer chooses to end your employment immediately rather than have you work the notice period, replacing it with an equivalent lump sum payment, which is where the post-2018 rules ensure that lump sum is taxed the same as if you'd simply worked and been paid as normal.
National Insurance Is the Sharpest Distinction
The clearest practical difference between PILON and genuine redundancy compensation is National Insurance: PILON attracts full Class 1 NI, the same 8%/2% employee rates and 15% employer rate that apply to ordinary salary, whereas genuine redundancy compensation up to £30,000 is NI-free entirely (employer NI does apply above £30,000). This means two leaving packages of the same total headline value can produce quite different net amounts for the employee, depending on how much of the total is PILON versus genuine redundancy compensation.
Reviewing Your Own Leaving Package
- Ask your employer (or check your settlement agreement) how the total package is split between PILON and redundancy compensation
- Confirm which parts are being taxed in full and which fall within the £30,000 exemption
- Check whether NI has been correctly applied only to PILON and any redundancy compensation above £30,000
- Keep the breakdown for your own tax records, particularly if you need to complete a Self Assessment return that year
Use the notice period and redundancy pay calculators below to estimate the tax due on the different elements of a leaving package.
Frequently asked questions
Is payment in lieu of notice (PILON) taxed the same as normal salary?
Yes — since rules introduced in April 2018, all PILON is treated as fully taxable earnings and subject to Class 1 National Insurance, regardless of whether your contract has a specific PILON clause. This closed off an older practice where some PILON payments could be structured to fall outside tax and NI.
Does PILON count towards the £30,000 tax-free redundancy exemption?
No — PILON is treated separately from the genuine redundancy element of a leaving package. The £30,000 exemption applies to a true redundancy payment (compensation for loss of employment), not to notice pay, which is taxed as normal earnings in full regardless of size.
What if my employer lets me work my notice instead of paying it in lieu?
If you work your notice period, you're simply paid your normal salary for that time, taxed exactly as any other pay. PILON becomes relevant specifically when the employer ends employment immediately and pays a lump sum instead of requiring you to work through the notice period.
Does National Insurance apply to PILON in the same way as redundancy pay?
No — this is a key difference. PILON is subject to Class 1 National Insurance in full, the same as ordinary salary, whereas a genuine redundancy payment up to £30,000 is generally exempt from National Insurance entirely (though the element above £30,000 does attract employer NI).
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Related reading
UK Settlement Agreement Tax Treatment 2026: What is Taxable?
How settlement agreement payments are taxed in 2026 -- the £30,000 tax-free exemption, PENP formula for notice pay, payments in lieu of notice, and PILON tax rules.
£115,000 After Tax UK 2026/27 — Take-Home Pay Breakdown
£115,000 a year after tax in 2026/27 is £74,257.40 net (£6,188.12/month). Personal Allowance taper applies. Full income tax, NI and Scotland breakdown for 2026/27.
£51,000 After Tax UK 2026/27 — Take-Home Pay Breakdown
£51,000 a year after tax in 2026/27 is £40,137.40 net (£3,344.78/month). Higher-rate tax applies on £730. Full income tax, NI and Scotland breakdown for 2026/27.