PILON Payment Tax Guide 2026/27: How Much You Keep
How is a payment in lieu of notice (PILON) taxed in 2026/27? Understand PENP, income tax, National Insurance and what lands in your pocket.
Quick answer
A PILON is taxed in full as employment income. For 2026/27 you pay income tax at 20%, 40% or 45% depending on your total income, plus Class 1 employee National Insurance of 8% (then 2% above GBP 50,270). The GBP 30,000 tax-free exemption does not cover PILON -- only genuine redundancy or termination compensation above your notice pay can use it.
What a PILON actually is
A payment in lieu of notice is what your employer pays when they end your employment immediately rather than letting you work your contractual notice period. Instead of keeping you on the books for, say, three months, they pay you the equivalent and you leave at once.
PILON can arise in two ways. Some contracts contain an express PILON clause giving the employer the right to make the payment. In other cases there is no clause, but the employer still pays for the notice period as part of a settlement. The tax treatment is now the same either way, which was the whole point of the rules introduced in April 2018.
Why PILON is taxed in full
Before 2018, a PILON paid without a contractual clause could sometimes be squeezed into the GBP 30,000 tax-free band for termination payments. Employers and advisers used this to reduce the tax bill. The government closed the loophole by creating Post-Employment Notice Pay, or PENP.
PENP is, in essence, the value of your basic salary for the part of your notice period you did not work. HMRC requires that this amount is taxed as normal earnings -- income tax through PAYE and Class 1 National Insurance -- regardless of how the payment is described. Only the slice of a settlement that genuinely sits above PENP can be treated as a termination payment and benefit from the GBP 30,000 exemption.
In practice this means a typical redundancy or exit package is split into parts that are taxed in very different ways.
How the package is split
Here is a simplified view of how the elements of an exit settlement are usually treated in 2026/27.
| Element of payment | Income tax | Employee National Insurance | GBP 30,000 exemption |
|---|---|---|---|
| Final salary and holiday pay | Yes | Yes | No |
| PILON / PENP (notice pay) | Yes | Yes | No |
| Statutory redundancy pay | Within exemption | No | Yes (up to GBP 30,000) |
| Enhanced redundancy / ex gratia | Above GBP 30,000 only | No (employee) | Yes (up to GBP 30,000) |
The point to absorb is that the notice-pay element is taxed exactly like wages, while genuine compensation for losing your job gets the favourable treatment up to GBP 30,000.
Worked example
Suppose you earn a basic salary of GBP 48,000 and have three months of unworked notice. Your PILON is therefore roughly GBP 12,000 (three months of basic pay). You are also paid GBP 25,000 of enhanced redundancy compensation.
The PILON of GBP 12,000 is your PENP. It is taxed in full:
- Income tax applies at your marginal rate. Because your salary already uses most of the basic-rate band (gross income up to GBP 50,270), much of the PILON falls into the 40% higher-rate band.
- Class 1 National Insurance applies at 2% on the portion above GBP 50,270, and at 8% on any part still within the GBP 12,570 to GBP 50,270 band.
The GBP 25,000 of genuine redundancy compensation sits within the GBP 30,000 exemption, so it is paid tax-free and free of employee National Insurance.
The exact figures depend on your other income for the year, so run your own numbers with the
Take-Home Pay Calculator
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Open Take-Home Pay calculatorWatch the band thresholds
Because PILON is often paid as a lump sum on top of final salary, it can push you into a higher band for the year:
- Above gross income of GBP 50,270, the higher rate of 40% applies.
- Above GBP 125,140, the additional rate of 45% applies.
- Between GBP 100,000 and GBP 125,140 your Personal Allowance is tapered away at GBP 1 for every GBP 2 of income, creating an effective marginal rate of around 60% on that band.
If a settlement risks tipping you into one of these zones, the timing of payment and any pension redirection become important. Check the impact with the
Income Tax Calculator
Work out how much income tax you owe using the latest 2025/26 UK tax bands.
Open Income Tax calculatorNational Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
Open National Insurance calculatorScotland
Scottish taxpayers pay Scottish income tax on the earnings element of a PILON. For 2026/27 the Scottish bands run starter 19%, basic 20%, intermediate 21%, higher 42%, advanced 45% and top 48%. A sizeable PILON can therefore be taxed at a notably different rate north of the border. National Insurance is the same UK-wide.
How the deductions reach you
Your employer applies PAYE to the PILON, so income tax and Class 1 National Insurance are taken before you receive anything. You get the net figure.
A common surprise is that the tax looks too high in the month of payment. PAYE can over-deduct when a large one-off sum lands in a single pay period, because the system can treat it as though that level of income will continue. If too much is taken:
- It may self-correct through your tax code if you start a new job in the same tax year.
- Otherwise you can reclaim any overpayment from HMRC after the tax year ends.
Either way, do not assume the first payslip figure is the final position.
Can you reduce the tax on a PILON?
There is no way to make the PENP element tax-free -- that is the entire purpose of the rules. But around the edges there are legitimate planning points:
- Pension contributions. If your settlement agreement permits it, redirecting part of the compensation element into a registered pension can be efficient, subject to the GBP 60,000 annual allowance (or GBP 10,000 if the Money Purchase Annual Allowance applies). See the calculator to see how contributions interact with your bands.ƒTry the calculator
Pension Calculator
Estimate your pension pot at retirement and projected annual income.
Open Pension calculator - Timing. Splitting payments across two tax years, where genuinely possible and agreed, can keep more income within lower bands.
- The GBP 30,000 slice. Make sure genuine compensation is correctly identified so it uses the exemption, rather than being lumped in with notice pay.
Pay everything in one tax year and a large PILON plus compensation can stack into the 40% or even 45% band, with part of your Personal Allowance lost. Spread or partly redirected to a pension, the same package can keep more income in the 20% band and preserve allowances. The difference can run to thousands of pounds.
This is YMYL territory: the framework above is general guidance, not advice on your specific settlement. For anything involving a six-figure package, the GBP 100,000 allowance taper, or unusual contract terms, take regulated tax or employment-law advice before signing.
Common mistakes to avoid
- Assuming the GBP 30,000 exemption covers your whole exit payment. It does not touch PILON or PENP.
- Forgetting that holiday pay and final salary also stack on top, using up band thresholds.
- Reading the first payslip as gospel when PAYE has over-deducted on a lump sum.
- Overlooking student loan deductions, which can apply to the earnings element above your plan threshold.
- Ignoring the Scottish rates if you are a Scottish taxpayer.
Bottom line
Treat the notice-pay element of any exit package as fully taxed salary, because that is exactly what HMRC does. The only genuinely tax-favoured part is true compensation for loss of your job, up to GBP 30,000. Model the whole year, watch the band thresholds, and use the
Take-Home Pay Calculator
Calculate your net salary after income tax, National Insurance and student loan deductions.
Open Take-Home Pay calculatorFrequently asked questions
Is a PILON payment taxable in the UK?
Yes. A payment in lieu of notice (PILON) is fully taxable as earnings. Whether or not your contract contains a PILON clause, HMRC treats the value of your basic pay for the unworked notice period as ordinary income. That means income tax at your marginal rate and Class 1 employee National Insurance both apply, exactly as if you had worked your notice. There is no GBP 30,000 tax-free allowance for the PILON portion.
Does the GBP 30,000 tax-free exemption apply to PILON?
No. The GBP 30,000 tax-free threshold applies to genuine termination payments such as statutory or enhanced redundancy compensation, not to PILON. Since the 2018 rules, the part of any settlement equal to your basic pay for the notice period (calculated as Post-Employment Notice Pay, or PENP) is carved out and taxed in full. Only the balance above PENP can benefit from the GBP 30,000 exemption.
What is Post-Employment Notice Pay (PENP)?
PENP is a formula HMRC uses to work out how much of a termination package represents unworked notice. It compares your total settlement to your contractual and statutory PILON, then taxes the PENP figure as normal earnings. The aim is to stop employers re-labelling notice pay as tax-free compensation. Your PENP is subject to income tax and Class 1 National Insurance; anything genuinely above it may use the GBP 30,000 exemption.
Do I pay National Insurance on PILON?
Yes. PILON and the PENP element of any settlement are subject to Class 1 employee National Insurance. For 2026/27 that is 8% on earnings between GBP 12,570 and GBP 50,270, and 2% above GBP 50,270. Employer National Insurance at 15% also applies to the employer. The GBP 30,000 exempt slice of a genuine termination payment is free of employee NI, though employer NI can apply above GBP 30,000.
How is PILON taxed if I am made redundant?
Your redundancy package is split. The PENP element, equal to your basic pay for the notice period, is taxed in full as earnings with income tax and Class 1 National Insurance. Genuine redundancy compensation above PENP uses the GBP 30,000 tax-free exemption, with any excess taxed as income but free of employee National Insurance. Statutory redundancy pay falls within the exempt category up to the GBP 30,000 limit.
Will a PILON push me into a higher tax band?
It can. PILON is added to your other taxable income for the year, so a lump sum paid alongside final salary may tip part of your earnings into the 40% higher-rate band (gross income above GBP 50,270) or even the 45% additional-rate band (above GBP 125,140). If your total income approaches GBP 100,000, the tapered Personal Allowance can create a 60% effective rate. Model your full-year position before you sign.
Is PILON paid before or after tax?
After tax. Your employer deducts income tax and Class 1 National Insurance through PAYE before paying the PILON to you, just like a normal salary payment. You receive the net figure. If the deductions look too high because the payment fell in a single month, you may be able to reclaim any overpaid tax after the end of the tax year, or it may correct itself through your tax code if you start a new job.
Can I pay my PILON into a pension to save tax?
Sometimes. If your settlement agreement allows it, redirecting part of a termination payment into a registered pension can be tax-efficient, subject to the GBP 60,000 annual allowance (or GBP 10,000 if the Money Purchase Annual Allowance applies). This is more commonly used for the compensation element than the PENP itself. Take regulated advice, as the rules on employer contributions and salary sacrifice from termination payments are technical.
Does Scotland tax PILON differently?
The structure is identical, but Scottish taxpayers pay Scottish income tax rates on the earnings element. For 2026/27 Scotland uses six bands: starter 19%, basic 20%, intermediate 21%, higher 42%, advanced 45% and top 48%. National Insurance is set UK-wide, so the 8% and 2% Class 1 rates are the same. A large PILON can therefore be taxed quite differently in Scotland than in England, Wales or Northern Ireland.
How do I check what my PILON take-home will be?
Add your expected PILON to any other taxable income for the year, then apply the 2026/27 income tax bands and Class 1 National Insurance. Because a lump sum interacts with allowances and band thresholds, the easiest approach is to run the figures through a take-home pay calculator. Remember to include final salary, holiday pay and any taxable element of a settlement, as they all stack on top of one another.
Try the calculators
Take-Home Pay Calculator
Calculate your net salary after income tax, National Insurance and student loan deductions.
Income Tax Calculator
Work out how much income tax you owe using the latest 2025/26 UK tax bands.
National Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
Related reading
Tax on Redundancy Pay UK 2026: What's Actually Tax-Free?
The £30,000 tax-free exemption, how statutory redundancy is calculated, PILON rules since April 2018, the PENP formula, settlement agreements, and NI changes from April 2020. Worked examples and 8 FAQs.
Settlement Agreement Tax in 2026: The GBP 30,000 Rule Explained
How settlement agreement payments are taxed in 2026/27: the GBP 30,000 exemption, what counts as taxable pay, PILON, NI rules and how to check your take-home.
Redundancy Pay vs Notice Pay: The Tax Difference in 2026/27
The £30,000 redundancy exemption and the PILON tax rules explained for 2026/27 -- with worked examples showing how to structure a settlement to minimise your tax bill.