Notice Pay Tax UK: Is It Taxable and How Much?

Notice Pay: The Basic Rule

When you leave employment — whether you resign, are made redundant, or are dismissed — any payment made for the notice period is employment income for tax purposes. Income tax and National Insurance are deducted through PAYE, at your normal rate.

There are no special tax rates or exemptions that apply to notice pay itself.

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How PILON Is Taxed

PILON (Payment In Lieu of Notice) is a lump sum paid when employment ends immediately rather than serving out the notice period. The tax treatment has been standardised since April 2018:

Pre-April 2018 (old rules): If a contract contained no PILON clause, the payment was sometimes treated as damages for breach of contract and could be included in the first £30,000 tax-free termination allowance.

Since April 2018 (current rules): All PILON — whether the contract has a PILON clause or not — is treated as Post-Employment Notice Pay (PENP) and is fully subject to income tax and NI as employment income. The old distinction between contractual and non-contractual PILON has been abolished.

PILON calculation

HMRC prescribes the formula for calculating PENP (the taxable notice element):

PENP = (Basic pay × unworked notice days) ÷ days in period

For most employees, PENP equals the full notice pay amount. Any excess above this may qualify for the £30,000 termination payment exemption.

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Garden Leave

Garden leave means you remain an employee throughout your notice period — your contract continues, your salary is paid, your benefits continue — but you don't come into work. Tax treatment is identical to normal employment:

• Income tax: deducted via PAYE on each payslip at your marginal rate
• NI: employee and employer contributions both apply
• Benefits in kind: BIK on company car, health insurance etc. continues
• Pension: employer contributions and auto-enrolment continue

There is no tax advantage or disadvantage to garden leave versus working your notice — the financial outcome is the same.

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The £30,000 Termination Payment Exemption

This is frequently misunderstood. The £30,000 exemption applies to termination payments — not to notice pay.

Example: You're made redundant with 3 months' notice (£6,000 PILON) plus enhanced redundancy of £40,000.

Employer NI (13.8%) applies to termination payments above £30,000 from April 2020.

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What Happens If Your Employer Pays It Wrong?

If your employer makes a notice payment without deducting tax (common in smaller firms or when HR is unfamiliar with the rules), you'll have a tax liability. HMRC will identify this:

• On your Self Assessment return (if you file one)
• Via a P800 tax calculation at year end
• Through your new employer's PAYE if they're using a cumulative basis

HMRC will collect underpaid tax either via an adjustment to your tax code in the following year (if under £3,000) or by issuing a demand via Self Assessment.

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Notice Pay and Redundancy Payments Together

When you receive both notice pay and a redundancy payment at the same time, they are taxed under different rules:

Your employer should provide a breakdown showing each element separately — ideally on your final payslip and P45.

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Negotiating Notice Pay in a Settlement Agreement

In settlement agreements (compromise agreements), the tax treatment of each element must be correctly categorised. A solicitor should always review settlement agreements — not just for legal protection, but to ensure tax efficiency.

If a settlement agreement incorrectly labels notice pay as a termination payment to take advantage of the £30,000 exemption, both parties face risk:

• HMRC can reclassify the payment and demand the unpaid tax
• Penalties may apply for inaccurate returns
• Your employer may require an indemnity clause to cover this risk