What is PILON (Pay in Lieu of Notice)?

Pay in Lieu of Notice (PILON) is a payment made by your employer instead of requiring you to work your notice period. Rather than attending work during your notice period, you receive a lump sum covering the pay you would have earned. This means your employment ends immediately and you receive the equivalent wages as a single payment.

Is PILON taxed in the UK?

Yes. Since 6 April 2018, all PILON payments are subject to income tax and National Insurance contributions, regardless of whether your contract includes a PILON clause. HMRC treats PILON as earnings, not as compensation. This applies to both contractual and non-contractual PILON. Only the separate statutory redundancy payment itself benefits from the £30,000 tax-free exemption.

Is PILON separate from redundancy pay?

Yes, PILON and redundancy pay are completely separate payments. Your statutory redundancy pay is compensation for losing your job and the first £30,000 is tax-free. PILON replaces the wages you would have earned during your notice period and is fully taxable as earnings. You are entitled to both if you are made redundant and not required to work your notice.

Can my employer make me take PILON instead of working my notice?

If your employment contract contains a PILON clause, your employer can choose to make a payment in lieu of notice rather than having you work the notice period. If there is no PILON clause, your employer may still offer PILON, but strictly speaking you have the right to work your notice period. In practice, most employees accept PILON when offered during redundancy as it allows them to move on more quickly.

How is PILON calculated?

PILON is calculated based on your basic pay for the notice period you would have worked. For example, if your notice period is 8 weeks and you earn £600 per week, your PILON would be £4,800 before tax and National Insurance deductions. PILON typically covers basic salary only, though contractual PILON clauses may specify whether benefits such as pension contributions and private healthcare are included.

Redundancy Pay and PILON (Pay in Lieu of Notice)

When you are made redundant, your employer may decide that you should leave immediately rather than work through your notice period. In that situation, you receive a payment called PILON, or Pay in Lieu of Notice. This is one of the most commonly misunderstood elements of a redundancy package, particularly when it comes to how it is taxed and how it sits alongside your statutory redundancy payment.

This guide explains what PILON is, how it works in practice, the important tax rules that changed in 2018, and how it interacts with the rest of your redundancy package. If you are facing redundancy, understanding PILON properly will help you know exactly what to expect in your final pay.

What Is Pay in Lieu of Notice (PILON)?

When your employer makes you redundant, they are normally required to give you a notice period before your employment ends. During that notice period, you continue working and receiving your normal pay. PILON is an alternative arrangement: instead of having you work through the notice period, your employer pays you a lump sum equivalent to the wages you would have earned and your employment ends immediately.

For example, if you have six years of service and are entitled to six weeks' statutory notice, your employer might offer you six weeks' pay as PILON rather than having you come into work for those six weeks. From the employer's perspective, this can be simpler and avoids the disruption of having a departing employee on site. From your perspective, it means you leave sooner but receive the same amount of money.

It is important to understand that PILON is not a bonus or an extra payment. It is the wages you would have earned during the notice period, paid as a lump sum. You should receive the same gross amount whether you work your notice or receive PILON, though the net amount after tax may differ slightly depending on how the payment is processed.

Contractual vs Non-Contractual PILON

There is an important distinction between contractual and non-contractual PILON, though the practical difference has narrowed significantly since the 2018 tax changes.

Contractual PILON

If your employment contract contains a PILON clause, your employer has an explicit contractual right to end your employment immediately and make a payment instead of notice. The clause will typically state something like: "The Company reserves the right to make a payment in lieu of notice equal to your basic salary for the notice period." When a PILON clause exists, the employer can exercise this right at any time without breaching the contract.

A contractual PILON clause will usually specify exactly what the payment covers. Some clauses are limited to basic salary only, while others may include the value of benefits such as pension contributions, car allowance or private medical insurance. It is worth reading your contract carefully to understand what is included.

Non-Contractual PILON

Where there is no PILON clause in the contract, the employer does not have an automatic right to end your employment early. Strictly speaking, making a PILON payment without a contractual clause is a breach of contract by the employer, because they are failing to provide the notice period you are entitled to. However, this breach is compensated by the PILON payment itself.

In practice, most employees are happy to accept non-contractual PILON during a redundancy situation. The distinction used to matter much more for tax purposes, but since the 2018 rule changes, both types of PILON are now taxed in the same way.

How PILON Is Taxed (Post-2018 Rules)

The tax treatment of PILON changed significantly on 6 April 2018 and it is crucial to understand the current rules. Before 2018, non-contractual PILON could sometimes be paid tax-free as damages for breach of contract. That loophole has now been closed.

The Current Position

Since April 2018, all PILON payments are subject to income tax and National Insurance contributions, regardless of whether the PILON is contractual or non-contractual. HMRC now applies a formula called "post-employment notice pay" (PENP) to calculate the amount that must be treated as taxable earnings.

The PENP calculation works out what your basic pay would have been for any unworked notice period and ensures that amount is taxed as normal earnings. This means PILON is taxed at your marginal income tax rate and has employee and employer National Insurance applied to it, just like regular wages.

PILON and the £30,000 Tax-Free Threshold

A common source of confusion is the relationship between PILON and the £30,000 tax-free threshold for redundancy payments. The key point is that PILON does not benefit from the £30,000 exemption. The tax-free threshold applies to genuine redundancy compensation, which includes your statutory redundancy pay and potentially any enhanced redundancy payment above the statutory minimum. PILON is treated as earnings, not compensation, and is therefore fully taxable.

For example, if you receive £15,000 in statutory and enhanced redundancy pay plus £5,000 in PILON, only the £15,000 redundancy element counts towards the £30,000 threshold. The £5,000 PILON is taxed in full through PAYE.

How PILON Interacts with Redundancy Pay

PILON and redundancy pay are entirely separate payments that serve different purposes. Understanding how they sit alongside each other is essential when assessing your total redundancy package.

Your Redundancy Pay

Statutory redundancy pay is compensation for losing your job. It is calculated using a formula based on your age, length of service (up to 20 years) and weekly pay (capped at £719 per week, or £749 in Northern Ireland). This payment is tax-free up to £30,000 and is a legal entitlement for employees with two or more years of continuous service.

Your Notice Pay or PILON

Notice pay, whether worked or paid as PILON, is the wages you are owed for the notice period. The statutory minimum notice for redundancy is one week per year of service, up to a maximum of 12 weeks. Your contract may provide for a longer notice period. PILON simply converts this obligation into a lump sum.

What Your Total Package Looks Like

A typical redundancy package might include several distinct elements:

Statutory redundancy pay - based on the formula, tax-free up to £30,000
Enhanced redundancy pay - any amount above statutory, tax-free up to the £30,000 threshold in total
PILON - taxable as earnings through PAYE
Accrued holiday pay - taxable as earnings
Any outstanding wages or bonuses - taxable as earnings

Only the redundancy pay elements benefit from the £30,000 exemption. Everything else, including PILON, holiday pay and outstanding wages, is taxed normally.

Can You Negotiate PILON?

If your contract does not contain a PILON clause, you technically have the right to insist on working your notice period. This can be worth considering if you would prefer to remain employed while looking for a new role, as you retain benefits such as pension contributions and may continue to accrue holiday entitlement during your notice period.

However, there are circumstances where accepting PILON can be advantageous. You are free to start a new job immediately, and if you find new employment quickly, you effectively receive double income for the overlap period. You also receive a lump sum that you can manage as you wish.

If your employer offers an enhanced redundancy package, the terms of the PILON arrangement may be part of the overall negotiation. Some employers are willing to structure payments in a more tax-efficient way, for example by agreeing to pay a longer notice period if it helps the overall package.

PILON and Garden Leave

PILON should not be confused with garden leave, though both involve not attending the workplace. During garden leave, you remain an employee throughout your notice period. You stay on the payroll, continue to receive your normal salary, and retain all employment benefits. You are simply not required to attend work or perform duties.

With PILON, your employment ends immediately. You receive a lump sum and your contract terminates on the day the PILON is agreed. This distinction matters for benefits, pension contributions, restrictive covenants, and your employment status for reference purposes.

What to Check When Offered PILON

If you are offered PILON as part of your redundancy, there are several things you should verify:

Check your contract for a PILON clause and note what it covers (basic pay only, or benefits too)
Confirm the calculation - ensure the PILON covers your full notice period entitlement, whether statutory or contractual, whichever is longer
Understand the tax treatment - PILON will be taxed, so the net amount will be less than the gross figure
Check your pension position - employer pension contributions usually stop when PILON is paid, unlike during worked notice or garden leave
Review any restrictive covenants - post-termination restrictions may start running from the PILON date rather than the end of a notice period
Ask about other benefits - private medical cover, life assurance and other benefits typically end on the PILON date

Your Rights if PILON Is Not Offered

Your employer is not obliged to offer PILON. They can require you to work your full notice period. During that time, you are entitled to a reasonable amount of paid time off to look for new work or arrange training, provided you have been continuously employed for at least two years.

If your employer dismisses you without proper notice and without making a PILON payment, this may be a breach of contract. You could potentially claim the notice pay owed to you through an employment tribunal or the county court. If you believe your redundancy consultation rights have not been respected, you should seek advice promptly.

Use Our Calculator to Check Your Entitlement

Your PILON payment is separate from your statutory redundancy entitlement, but it is important to know both figures. Use our free UK Redundancy Pay Calculator to calculate your statutory redundancy pay in seconds. Simply enter your age, weekly pay and length of service to get an instant breakdown. You can then add the PILON figure on top to understand your full package.