Yes. Since 6 April 2018 all payment in lieu of notice (PILON) is taxed as earnings. Income tax and National Insurance are deducted through PAYE, whether or not the payment is mentioned in your contract, under the post-employment notice pay rules. It is no longer possible to receive notice pay tax-free.
What is payment in lieu of notice?
PILON is money your employer pays so you can leave immediately instead of working your notice period. It stands in for the wages you would have earned during notice. It is common in redundancy and dismissal, and because it is treated as pay it appears on your final payslip rather than being paid outside payroll.
Why is PILON taxed in full now?
Before April 2018, a non-contractual PILON could sometimes be paid free of tax. The post-employment notice pay (PENP) rules, added to ITEPA 2003 by the Finance Act 2017, ended that distinction. Your employer calculates the PENP, the basic pay you would have earned in your notice, and taxes it in full as general earnings. This matters because it removed a planning route people once relied on at exit.
Does the £30,000 tax-free amount cover PILON?
No. The £30,000 exemption for genuine termination payments does not apply to the notice-pay element. Your employer taxes the PENP first, and only the balance of any genuine redundancy or ex-gratia payment can use the £30,000 band. Statutory redundancy pay is itself tax-free and sits inside that band, so the order the payment is worked out in changes your take-home.
Primary sources
- EIM13874: post-employment notice pay — gov.uk — HMRC guidance on the PENP rules that tax notice pay
- Income Tax (Earnings and Pensions) Act 2003, section 402B — legislation.gov.uk — Post-employment notice pay, inserted by Finance Act 2017
- Income Tax (Earnings and Pensions) Act 2003, section 403 — legislation.gov.uk — The £30,000 exemption for genuine termination payments
- Tax on termination payments — gov.uk — How PILON, redundancy and ex-gratia payments are taxed
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