exitagreementPayment in lieu of notice (PILON)
Payment in lieu of notice means being paid for your notice period instead of working it. That part is simple. What catches people is the tax: PILON is taxed in full, it never gets the £30,000 threshold, and calling it something else in a settlement agreement does not change that.
PILON and the words around it
Nine terms turn up around notice, and they are taxed in two completely different ways. The third column is the one that matters.
| Term | What it is | Tax consequence |
|---|---|---|
| PILON (payment in lieu of notice) | Pay for the notice period, paid instead of the notice being worked | Earnings if your contract provides for it — ITEPA 2003 s.62 |
| PILON clause | A term in your contract letting the employer end the employment immediately and pay notice | Makes the payment contractual, and therefore earnings |
| No PILON clause, paid anyway | Damages for ending the contract without the notice it required | Still taxed on the notice element under the post-employment notice pay rules |
| Post-employment notice pay (PENP) | A statutory calculation of the notice you did not work, ITEPA 2003 s.402D | Treated as earnings whatever the payment is called, ITEPA 2003 s.402B |
| Statutory notice | The legal minimum, ERA 1996 s.86(1) | Your contract can give more, never less |
| Contractual notice | Whatever your contract says, if it is longer than the statutory minimum | The period a PILON is normally calculated on |
| Garden leave | You stay employed for the notice period but are told not to work | Still employed, so still earnings — and the employment ends later |
| Notice pay (worked) | Ordinary wages for a notice period you actually work | Earnings, like any other month |
| Ex gratia / compensation | Money for losing the job, which you were not otherwise owed | The only part that can use the £30,000 threshold |
Every provision named is linked to its text on legislation.gov.uk. Checked 22 September 2026.
Key points
- PILON is paid instead of working your notice. The employment ends now; the notice is paid in money.
- It is taxed as earnings, in full. A contractual PILON is earnings, and the chapter containing the £30,000 threshold does not apply to earnings.
- Relabelling does not help. Post-employment notice pay recalculates the notice element from your pay and your dates, whatever the agreement calls it.
- It is separate from redundancy pay, and the two are often bundled into one figure that hides which part is taxed.
- Whether it is pensionable depends on your scheme rules. There is no general answer.
What PILON means
A contract of employment can normally only be ended by giving the notice it requires. PILON is the alternative: the employer ends the employment straight away and pays you what you would have earned over the notice period instead.
With a PILON clause
Some contracts contain a term that expressly allows this — a PILON clause. Where there is one, paying in lieu is simply the employer using a right the contract gives them, and the payment is a contractual entitlement.
Without one
Where there is no such clause, ending the employment without the required notice is generally a breach of contract, and the payment is in the nature of damages for that breach. It still ends the employment. As the next sections show, the difference between the two used to matter a great deal for tax, and now largely does not.
How much notice you are owed
At least the statutory minimum, and more if your contract says so.
The notice required to be given by an employer to terminate the contract of employment of a person who has been continuously employed for one month or more— (a) is not less than one week’s notice if his period of continuous employment is less than two years, (b) is not less than one week’s notice for each year of continuous employment if his period of continuous employment is two years or more but less than twelve years, and (c) is not less than twelve weeks’ notice if his period of continuous employment is twelve years or more.Read the section on legislation.gov.uk
So statutory notice is capped at 12 weeks, but a contract can give more, and often the contractual figure is the one that matters. PILON is normally calculated on whichever is longer.
Is PILON taxable?
Yes, and the reason is structural rather than a matter of HMRC practice. Two sections of the Income Tax (Earnings and Pensions) Act 2003 do it between them.
A contractual PILON is earnings
In those Parts “earnings”, in relation to an employment, means— (a) any salary, wages or fee, (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or (c) anything else that constitutes an emolument of the employment.Read the section on legislation.gov.uk
A payment you are entitled to under your contract is an emolument of the employment. That makes it earnings, taxed like salary.
Why the £30,000 threshold never reaches it
The threshold lives in Chapter 3 of Part 6 of the Act — the chapter for termination payments. And Chapter 3 shuts the door on anything already taxable elsewhere.
This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with— (a) the termination of a person’s employment … This Chapter does not apply to any payment or other benefit chargeable to income tax apart from this Chapter.Read the section on legislation.gov.uk
Read the last sentence. A payment that is already chargeable as earnings is not a Chapter 3 payment at all, so it never gets as far as the threshold. That is the whole reason PILON is taxed in full.
And a non-contractual PILON is caught anyway
There used to be a gap: a payment in lieu made without a PILON clause was damages rather than earnings, and could sometimes use the threshold. Sections 402A to 402E, inserted by the Finance (No. 2) Act 2017, s.5(3), closed it. They calculate the notice you did not work arithmetically and treat that amount as earnings.
The amount of a termination award to which this section applies is treated as an amount of earnings of the employee, or former employee, from the employment.Read the section on legislation.gov.uk
What we have not verified
The National Insurance treatment of PILON sits in different legislation that this site has not read from a primary source, so we do not state it here. Why we leave it out rather than guess.
How to calculate PILON
For a contractual PILON, it is whatever your contract says the payment is — usually basic pay for the notice period, sometimes including benefits or a bonus element if the clause says so.
The statutory formula for the notice element
For tax purposes the statute supplies its own formula, and it is a useful cross-check on any figure you are offered.
BP is the employee’s basic pay from the employment in respect of the last pay period of the employee to end before the trigger date, P is the number of days in that pay period, and D is the number of days in the post-employment notice period.Read the section on legislation.gov.uk
In plain terms: take your basic pay for your last full pay period, turn it into a daily rate, and multiply by the number of days in the post-employment notice period. Whatever that produces is the part of your leaving payment that will be taxed as earnings regardless of its label.
What is and is not included
The statutory formula uses basic pay, which is narrower than everything you are paid. Whether a contractual PILON includes commission, bonus, car allowance or pension contributions is a question about how your contract defines it — and it is one of the most common places a first draft is wrong. The calculator works out notice pay alongside the other fixed elements.
Not sure whether your notice figure is right?
It is one of the most common errors in a first draft. Send your postcode and the deadline you have been given.
PILON and redundancy
You are entitled to notice in a redundancy as in any other dismissal. If you do not work it, you are normally paid in lieu — and that payment is separate from statutory redundancy pay.
Two payments, two tax treatments
Statutory redundancy pay is a termination payment that counts towards the £30,000 threshold. PILON is earnings and is taxed in full. They are frequently presented together as one “redundancy package”, which is exactly why it is worth asking for the split. How to take a redundancy offer apart · how the statutory figure is worked out.
If you are already on notice and want to leave early
Section 95(2) of the Employment Rights Act 1996 means that giving shorter counter-notice within the employer’s notice period does not turn a dismissal into a resignation. What that rule does and does not cover.
Is PILON pensionable?
This is one of the most searched questions about PILON and there is no single answer to it.
It depends on two documents
Whether pension contributions are made on a payment in lieu depends on your pension scheme’s rules and on how your contract defines pensionable pay. Neither is set by statute in a way that gives a general rule, so anyone who gives you a flat yes or no without reading both is guessing.
Why it is worth asking
Employer pension contributions over a long notice period can be a real amount, and they are easy to overlook because they never appear in the headline figure. Ask the question explicitly before you agree the number.
PILON or garden leave?
Both are ways of not working your notice, and they are often confused. The difference is whether you are still employed.
| PILON | Garden leave | |
|---|---|---|
| Still employed? | No — employment ends now | Yes, until the notice expires |
| Paid how? | A lump sum in lieu | Normal salary, month by month |
| Tax | Earnings | Earnings |
| Termination date | Now | End of the notice period |
| Can you start a new job? | Subject to any restrictive covenants | You remain employed and bound by your contract until it ends |
The termination date is the practical difference. Restrictive covenants usually run from it, your tax year position can turn on it, and the payment date in a settlement agreement is often measured from it.
PILON inside a settlement agreement
In a settlement agreement, PILON sits in the contractual half of the money — the part you were owed anyway and that is taxed in full. The negotiated compensation sits in the other half.
Check the notice figure, do not negotiate it
The notice element is arithmetic. Checking that the draft uses your contractual notice rather than the statutory minimum is worth doing and frequently finds money. Arguing about it beyond that usually produces nothing. Where the negotiation actually is.
The tax indemnity
If the agreement puts too much into the compensation half and HMRC later disagrees, the tax indemnity in most agreements sends that bill to you. The clause, and the three things to ask about it · how the whole payment is taxed · what an ex gratia payment is, and when it is not.
Common questions
What does payment in lieu of notice mean?
It means being paid for your notice period instead of working it. The employment ends now rather than at the end of the notice, and the money that would have been paid over the notice period is paid instead. The phrase is usually shortened to PILON.
Is PILON taxable?
Yes, in full, in almost every case. If your contract provides for it, it is earnings under section 62 of the Income Tax (Earnings and Pensions) Act 2003, and section 401(3) then keeps it out of the chapter where the £30,000 threshold lives. If your contract does not provide for it, the post-employment notice pay rules in sections 402A to 402E still calculate the notice element and treat it as earnings.
Can PILON be paid tax free as part of a settlement?
Not by relabelling it. Calling the notice element 'compensation' in the agreement does not move it into the part that can use the threshold, because the post-employment notice pay calculation is done from your basic pay and your dates, not from the words in the document.
How do I calculate PILON?
Normally your basic pay for the notice period you would otherwise have worked. The statute's own post-employment notice pay formula takes your basic pay for the last pay period, divides it by the number of days in that period and multiplies by the number of days in the post-employment notice period. Whether bonus, commission or benefits are included in a contractual PILON depends on how your contract defines it.
Do I get PILON if I am made redundant?
You are entitled to notice in a redundancy just as in any other dismissal, and if you do not work it you are normally paid in lieu. It is separate from statutory redundancy pay, which is calculated on its own formula and can use the tax threshold. The two are often added together in one 'package', which is exactly why it is worth separating them.
Is PILON pensionable?
There is no general answer. Whether pension contributions are made on a payment in lieu depends on your pension scheme's rules and on how your contract defines pensionable pay. It is a question to ask before you agree the figure, because it is easy to miss and it can be a real amount.
What is the difference between PILON and garden leave?
On garden leave you are still employed: you are paid normally, told not to work, and the employment ends at the end of the notice period. With PILON the employment ends now and the notice is paid instead. Both are taxed as earnings. The difference matters for the termination date, for restrictive covenants that run from it, and for anything that depends on still being employed.
Can my employer pay in lieu without a PILON clause?
They can pay you, but without a clause permitting it, ending the contract without the notice it requires is a breach, and the payment is in the nature of damages for that breach. It does not change the tax: the notice element is still pulled into earnings by the post-employment notice pay rules.
Sources cited on this page
- Employment Rights Act 1996, s.86 — minimum notice
- Income Tax (Earnings and Pensions) Act 2003, s.62 — earnings
- Income Tax (Earnings and Pensions) Act 2003, s.401 — application of Chapter 3
- Income Tax (Earnings and Pensions) Act 2003, s.402B — awards treated as earnings
- Income Tax (Earnings and Pensions) Act 2003, s.402D — post-employment notice pay
- Income Tax (Earnings and Pensions) Act 2003, s.403 — the £30,000 threshold
- Acas — Discussing and negotiating an offer (PILON is taxed)
Every figure above was read from the source it is attributed to on 19 September 2026. How we check this.
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