Rule · Finance (No.2) Act 2017 s.5

PILON tax treatment

Before April 2018 the tax treatment of Pay In Lieu Of Notice depended on whether your contract had a PILON clause. Since then HMRC applies a single Post-Employment Notice Pay formula to all termination packages.

The PENP formula

PENP = (BP × D) ÷ P − T

BP: your basic pay in the last pay period that ended before the trigger date
D: number of days in the unworked portion of your notice period
P: number of days in that pay period
T: any payment already taxed as earnings (so it is not double-counted)

The PENP figure is taxed as earnings (full income tax + employee NIC + employer NIC). Source: F(No.2)A 2017 s.5 and HMRC EIM13874.

Worked example: £40,000 + 3 months PILON

Monthly basic pay £4,000. 3 months unworked notice = 91 days. Pay period 30 days. PENP = (£4,000 × 91) ÷ 30 = £12,133 taxed as earnings. The remaining package (statutory redundancy + enhanced top-up + ex-gratia minus PENP) then runs against the £30,000 exemption in ITEPA 2003 s.401.

Does a contractual PILON clause change anything?

Under the pre-2018 case law, a contractual PILON was always taxable as earnings, while a damages-style PILON could shelter under the £30k exemption. The 2018 PENP reform removed that distinction. Today both routes produce the same tax outcome via the PENP formula.