What is Post-Employment Notice Pay (PENP)?

Full Definition

Post-Employment Notice Pay (PENP) is a statutory calculation, introduced in April 2018, used to determine how much of a termination payment made to a departing employee represents payment for notice they did not work, as distinct from genuine compensation for loss of employment. This matters because the £30,000 tax exemption that can apply to termination payments (covering things like ex-gratia redundancy payments or settlement sums for loss of office) only applies to the genuine compensation element; PENP itself is treated as earnings and is always fully subject to income tax and Class 1 National Insurance in the normal way, regardless of how the payment is labelled in a settlement agreement or termination letter. PENP is calculated using a set formula based on the employee's basic pay, their unworked notice period, and any notice period actually worked, broadly working out what the employee would have earned if they had worked their full contractual or statutory notice period and comparing that to any contractual payment in lieu of notice (PILON) actually specified in the contract. Where an employer terminates employment immediately and pays a lump sum instead of requiring the employee to work their notice, HMRC requires the PENP amount to be identified and taxed as earnings even if the employer's contract has no formal PILON clause, closing a previous loophole where some employers structured payments to avoid tax by not including a contractual PILON clause at all. Only the balance of the termination payment above the calculated PENP figure can potentially benefit from the £30,000 exemption, and even then, only to the extent it represents a genuine payment for loss of employment rather than disguised notice pay or other earnings. Worked example: an employee with a three-month notice period and £4,000 monthly basic pay is dismissed with immediate effect and paid a £20,000 termination payment; the PENP calculation values the unworked three months of notice at £12,000, which must be taxed and subject to National Insurance as normal earnings, leaving only the remaining £8,000 as a potentially tax-exempt termination payment (assuming it genuinely compensates for loss of employment and the employee's total exempt termination payments across the tax year stay under £30,000) -- illustrating why settlement agreements must carefully separate the PENP calculation from the rest of any lump sum.

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