Pay in Lieu of Notice (PILON) and Redundancy: How the Tax Actually Works in 2026/27
PILON is taxed differently from the statutory redundancy payment itself. How Payment in Lieu of Notice is treated for tax and National Insurance in 2026/27, with worked examples.
Quick answer
When a job ends, several different payments can be bundled into one final settlement — pay in lieu of notice, statutory or enhanced redundancy pay, and accrued holiday pay — but they are not all taxed the same way. PILON and holiday pay are taxed as ordinary earnings in full; genuine redundancy pay up to £30,000 can be paid free of income tax and employee National Insurance. Getting this distinction wrong is one of the most common sources of confusion (and disputed payslips) at the end of employment.
Redundancy Pay Calculator
Calculate your statutory redundancy pay based on age, length of service and weekly pay.
Redundancy pay calculatorWhy PILON is always taxed in full
Before April 2018, whether PILON was taxed depended on a technical distinction: if there was a contractual right to pay in lieu of notice, it was taxed as earnings; if there wasn't, it could sometimes be treated as damages for breach of contract and paid without deduction. This created an incentive to draft employment contracts to avoid a PILON clause purely for tax reasons. Since 6 April 2018, all PILON is taxed and subject to National Insurance as earnings, regardless of whether the contract contains a PILON clause — removing that planning opportunity entirely.
Notice Period Calculator
Calculate UK statutory and contractual notice period plus PILON or garden leave pay.
Notice period calculatorWhere the £30,000 exemption actually applies
The £30,000 tax-free exemption is specifically for genuine termination payments connected to the redundancy or ending of employment — statutory redundancy pay, and qualifying enhanced redundancy pay above the statutory minimum, count towards this limit. PILON, accrued holiday pay, bonuses, and any other payment that is really just delayed earnings do not benefit from the exemption, even if they're paid at the same time and described loosely as "redundancy money" in conversation.
The employer-side National Insurance change
Since April 2020, employers have been liable for Class 1A National Insurance (at the standard employer rate) on the portion of a termination payment that exceeds £30,000, even though that same excess doesn't attract employee National Insurance. This is a cost employers factor into the overall price of a redundancy exercise or settlement negotiation, and it's part of why settlement agreements are drafted carefully around exactly how much sits above the £30,000 line.
Reading a settlement agreement properly
A well-drafted settlement agreement should break payments down line by line: PILON, statutory redundancy pay, enhanced redundancy pay, accrued but untaken holiday, and any other separate payments (such as a discretionary ex gratia sum). Anyone receiving a lump-sum settlement figure without this breakdown should ask for it specifically, both to check the tax withheld is correct and to understand how much of the total payment is genuinely tax-free.
Bottom line
PILON is simply salary by another name for tax purposes — it's the genuine redundancy element, capped at £30,000, that gets favourable treatment, and the two should never be assumed to be taxed the same way just because they arrive in the same bank transfer.
Sources
- gov.uk: Tax on termination of employment payments
- gov.uk: Redundancy: your rights
- gov.uk: Statutory redundancy pay
Frequently asked questions
Is Payment in Lieu of Notice (PILON) taxed the same as redundancy pay?
No. PILON is treated as employment income and is subject to income tax and National Insurance in full, in the same way as normal salary, whereas the statutory redundancy payment itself (and qualifying enhanced redundancy pay up to the relevant limit) can benefit from the £30,000 tax-free exemption.
Does it matter whether PILON is contractual or not?
Since April 2018, all PILON payments are taxed and NI'd as earnings regardless of whether there is a contractual PILON clause — this removed the previous distinction where non-contractual PILON could sometimes be paid tax-free as damages for breach of contract.
How much of a redundancy payment is tax-free?
Up to £30,000 of a genuine redundancy payment (statutory redundancy pay plus qualifying enhanced payments, but not PILON, holiday pay or other contractual entitlements bundled into the same settlement) can be paid free of income tax.
Is redundancy pay subject to National Insurance?
The genuine redundancy element up to £30,000 is free of both income tax and employee National Insurance, but from April 2020 the employer became liable for Class 1A National Insurance on the portion of a termination payment above £30,000, which employers factor into settlement costs.
How should a settlement agreement break down PILON, redundancy pay and holiday pay?
A properly drafted settlement agreement should itemise each element separately — PILON, statutory and enhanced redundancy pay, accrued but untaken holiday pay, and any other contractual payments — because each has a different tax and NI treatment, and lumping them together can lead to incorrect tax being withheld.
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Related reading
Redundancy Pay Split Across Tax Years: Does It Reduce Your Tax Bill in 2026/27?
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Tax on Redundancy Pay Over £30,000 UK 2026/27
How redundancy pay over £30,000 is taxed in 2026/27: the £30,000 tax-free exemption, why PILON and bonuses are fully taxable, and how the excess is taxed at your marginal rate — with worked examples.
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.