Payments In Lieu of Notice – a taxable PENP

Payments in Lieu of Notice to employees will alter

From the start of 6th April 2018, the tax treatment of Payments in Lieu of Notice (PILON) to employees will alter due to Finance (No 2) Act 2007 which received Royal Assent on 16 November 2017. Clause 5 of the Act inserts the new sections 402A to 402E into Chapter 3 of Part 6 (Payments and Benefits on Termination of Employment etc) of ITEPA 2003. See here on

It has been a normal approach to remove the entitlement for Payment in Lieu of Notice from employment contracts. With no contractual right to make the payment it is considered not to be employment related, unless it is customary to make such a payment. As such the payment is treated as part of the £30,000 tax exempt amount on termination which was totally exempt from NI (both employers’ and employees’).

For termination payments after 6 April 2018, all employees will have a sum that is to be classed as a PILON and therefore subject to tax and NI, regardless of what their contract says. This will be known as Post-employment Notice Pay (PENP).

Before considering the statutory formula for PENP, key dates need to be established. The “trigger date”, is:

  • the last day of employment if there was no notice given by either the employee or employer; or
  • the date that the notice was given.

The length of the PENP period is the period between the trigger date and the date on which an individual’s employment could have been terminated legally, i.e. when the notice period would have ended. The PENP is calculated using “basic pay” for the pay period that ends immediately before the trigger date, so if the last day of employment was 31st March, the “basic pay” would be that paid in February.

The formula for PENP is based around a precise meaning of basic pay which does not include:

(i) any amount received by way of overtime, bonus, commission, gratuity or allowance,
(ii) any amount received in connection with the termination of the employment,
(iii) any amount treated as earnings under Chapters 2 to 10 of Part 3 (the benefits code) or which would be so treated apart from section 64,
(iv) any amount which is treated as earnings under Chapter 12 of Part 3 (amounts treated as earnings),
(v) any amount which counts as employment income by virtue of Part 7 (income relating to securities and securities options), and
(vi) any employment-related securities that constitute earnings under Chapter 1 of Part 3 (earnings), and
(b) any amount which the employee has given up the right to receive but which would have fallen within paragraph (a) had the employee not done so.

PENP formula

The complex legislation in s.402C Finance Act (No.2) 2017 provides for the following formula:

  • BP is the basic pay (defined above) that the employee would have received had they continued in employment
  • D is the number of calendar days in the notice period (e.g. seven days, 14 days etc.) or where the pay period is a month, one month, two months etc. (defined above)
  • P is the number of calendar days in the pay period before the trigger date (defined above)
  • T is the total amount of all the taxable elements of the termination package.

The formula is shown like this:

((BP x D) / P) less T.


An employee’s employment is terminated without notice on 30 April 2018. The employee is paid £4,000 monthly (basic pay); has a three months’ notice period; and there is no contractual PILON. They receive £30,000 compensation on termination. This an ex gratia damages payment, not linked to any contractual terms such as bonus entitlement.

  • Under the old rules, the whole compensation payment qualifies for the £30,000 exemption.
  • Under the new rules, income tax and NICs (both employer and employee) are due on the PENP of £12,000. The balance of £18,000 qualifies for the exemption.

Linda Eales – Vantage Fee Protect Tax Consultant

Further help and information is available in our Resources Section.

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