What PILON is
Payment in lieu of notice means your employer pays the cash value of your notice period and ends your employment immediately rather than having you work it out (or sit on garden leave).
The mechanics: your last day of employment is the date PILON is paid (or the formal termination date written into the offer). You receive in your final pay run: - Salary up to the termination date - Holiday pay for accrued but untaken leave - PILON for the notice period - Statutory + enhanced redundancy (if applicable)
After the termination date, you're no longer an employee. You can start a new job the same day.
Why employers choose PILON
Common reasons:
- Competitive risk. If you might join a competitor during notice, the employer prefers immediate termination
- Customer relationships. Customer-facing roles in financial services or sales often see PILON used
- Restrictive covenants. Some non-compete clauses only enforce against the period from termination — PILON shortens the period of employment they need to navigate
- Cost control. Garden leave costs salary + benefits for the full notice; PILON is a cleaner single payment
- Speed. Closing out the relationship cleanly is sometimes worth more than the marginal money saved
The April 2018 tax change
This is the single most important point on PILON. Before April 2018:
- If your contract had a PILON clause, PILON was treated as salary → taxable + NI'd
- If your contract did NOT have a PILON clause, PILON could be paid as part of the £30,000 tax-free redundancy lump sum → tax-free up to that limit
This created an obvious incentive: don't write a PILON clause and save your departing employees thousands in tax.
Since April 2018, HMRC closed the loophole. All PILON is treated as taxable earnings, regardless of whether the contract authorises it. The technical mechanism: HMRC introduced Post-Employment Notice Pay (PENP) — the deemed portion of any termination payment that replaces notice wages. PENP is taxed and NI'd as salary.
Worked PILON example — £60,000 salary, 12 weeks' notice
Gross PILON = (£60,000 / 52) × 12 = £13,846
Tax (assuming higher-rate band has been reached for the year): - Slice above the higher-rate threshold = taxed at 40% Income Tax + 2% NI = 42% - Approximate tax + NI on the PILON: £13,846 × 0.42 = £5,815 - Net PILON: £13,846 − £5,815 = £8,031
Same person if PILON were tax-free: net = £13,846. The 2018 change costs this employee £5,815.
PILON vs working notice — same money, different freedom
Both pay the same gross. The difference is what you can do during the notice:
| Factor | Working notice | PILON |
|---|---|---|
| Continue building service | Yes | No |
| Pension contributions continue | Yes | One-off; potential sacrifice into pension if planned |
| Start a new job during notice | No | Yes, immediately |
| Restrictive covenants enforced from | Termination date | Effective date stated in offer |
| Holiday accrued during notice | Yes | Slightly more nuanced |
The "start a new job immediately" point matters. If you have an offer in hand, PILON is preferable. If you're still looking, working notice gives more time on payroll.
The PENP calculation — for variable pay or salary sacrifice
If your normal pay is variable (sales commission, regular bonuses) or you have salary sacrifice in play, HMRC's PENP rules apply a precise calculation to determine what counts as "PILON for tax purposes":
PENP = (BP × D / P) − T
Where: - BP = Basic Pay in last full pay period before notice - D = Number of days in unworked notice period - P = Number of days in last pay period - T = Amounts already taxed as employment income during the notice period
This catches cases where employers try to inflate the £30k tax-free portion at the expense of PILON. The HMRC test catches genuine notice-pay equivalents regardless of label.
Holiday pay and PILON
Accrued unused holiday is paid separately from PILON, not as part of it:
- Accrued holiday up to termination date = paid in final pay run, taxable + NI'd as salary
- Holiday that would have accrued during the unworked notice period = not paid (you weren't employed during it)
If you'd planned holiday during your notice, it's lost in PILON — one of the small downsides versus working notice or garden leave.
Pension contributions during PILON
Employer pension contributions for the unworked notice period are usually NOT made. Some packages include a "pension top-up" payment in lieu — this is itself fully taxable as PILON-equivalent.
If you want to mitigate tax on a large PILON, the strongest move is usually to negotiate the PILON to be paid into pension via salary sacrifice in the final month of employment — this happens before the PILON is taxed and effectively converts the gross PILON into pension contributions skipping Income Tax + NI. Requires both employer agreement and timing (must be before termination). Read about salary sacrifice →
This is one of the highest-value moves available in the £30k+ redundancy package design space — but it has to be requested before signing the offer.
Notice pay vs settlement-agreement ex gratia
Settlement agreements sometimes describe payments ambiguously. The HMRC test is functional: any payment that effectively replaces wages for the notice period is PENP/PILON and taxable, regardless of label. Genuinely "ex gratia" payments — additional sums beyond what statutory/contractual minimums require — can sit inside the £30,000 tax-free threshold.
The line is enforced through PENP calculations. Always get a tax-aware solicitor review of any settlement agreement with PILON labelled differently.
When PILON is paid
PILON is usually paid in the final pay run after termination, sometimes the same day. The Income Tax band that applies depends on your year-to-date earnings — a December PILON looks different from an April PILON.
If your PILON is large and falls in a year where you've already exceeded the higher-rate threshold, the entire PILON sits at 40%+. If you can negotiate the termination date into early April (next tax year), the PILON gets a fresh tax allowance — sometimes worth thousands.
Practical checklist
When the redundancy offer arrives:
- Verify PILON gross amount. Should equal weeks of notice × normal weekly pay
- Check holiday pay is separate. Not bundled into PILON
- Consider pension salary sacrifice. If practical, the PILON can be sacrificed into pension before tax — large potential saving
- Plan tax-year timing. If termination is around 5 April, the difference matters
- Compare against working notice value. Same gross, different freedoms — pick the one that fits your next move
In short
PILON is your employer's option to end your employment immediately and pay the notice period as a lump sum. Since April 2018, it's fully taxable as ordinary salary — never inside the £30,000 tax-free redundancy threshold. Use the take-home calculator to model the net amount. For the broader redundancy context, see the redundancy hub.