PILON and PENP explained

Already have a PILON or PENP figure from your employer? Enter it in the redundancy calculator to estimate the Income Tax, National Insurance and student loan on it.

PILON vs PENP

What is PILON?

PILON is money paid because your employment ends before you have worked all of your notice. For example: you leave immediately and the employer pays three months' notice; you work one month of a three-month notice and are paid for the other two; or a settlement agreement includes a separate notice-pay line. It's taxed like normal pay — Income Tax, employee National Insuranceand student/postgraduate loan where they apply — and does not use the £30,000 exemption.

Contractual or not, it's taxed. Before 2018 the result sometimes depended on whether the contract expressly allowed PILON. That's no longer a loophole: HMRC's rules identify and tax the notice-pay element whether or not the contract provides for PILON.

What is PENP?

PENP is not necessarily extra money. It's the part of a relevant termination award that HMRC treats as notice pay:

The employer must work out PENP even where there's a contractual PILON; the PILON already taxed is subtracted in the formula so the same notice pay isn't taxed twice.

When can PENP apply?

• No notice worked — if employment ends at once and you were entitled to notice, part of a severance payment can become PENP.
• Only part of the notice worked — PENP can apply to the unworked part.
• No “PILON” in the agreement — a missing PILON line doesn't make notice pay tax-free; PENP can be carved out of compensation or enhanced redundancy.
• Full notice worked — if you work all your notice to the last day, there's usually no post-employment notice period, so PENP is nil (your notice-period salary is still taxed as earnings).

What about gardening leave?

On gardening leave you usually stay employed — paid salary and benefits but not doing your normal work. That pay is taxed as normal earnings, and if gardening leave covers your whole notice up to the termination date there's usually no post-employment notice period.

The PENP formula

The simplified monthly version can be used where the last pay period is a month, salary is paid in 12 equal monthly instalments, and the unworked notice period is a whole number of months (so a 3-month entitlement with 17 days worked doesn't qualify):

The full HMRC formula is:

The result can't be less than zero, and can't exceed your total relevant termination awards.

• BP — basic pay in the last pay period before the trigger date. It usually excludes overtime, bonus, commission, allowances, benefits and the termination payments themselves — and is taken before any salary-sacrifice reduction.
• D — unworked notice: the days between your last day of employment and the earliest lawful termination date (using the longer of contractual or statutory notice).
• P — last pay period: the days in your last pay period before the trigger date. If the last pay period is monthly, salary is paid in 12 equal monthly instalments, and the unworked notice is not a whole number of months, HMRC requires P = 30.42.
• T — taxable PILON already paid: notice pay already taxed as earnings. Don't fold in holiday pay or a termination bonus, or PENP will be understated.

Example 1 — contractual PILON covers the notice

PENP is £0 — but that does not make the £9,000 tax-free. The £9,000 PILON is still Income Tax + employee NI; the £15,000 severance may use the £30k exemption. The notice pay is simply already taxed as PILON, so the formula doesn't carve out a second amount.

Example 2 — notice pay hidden inside severance

Here £9,000 of the £20,000 severance is PENP — taxed as earnings — and only the remaining £11,000 may use the £30,000 exemption. This is exactly why you can't just call a whole severance “tax-free compensation”.

Example 3 — part of the notice was worked

The £2,000 PILON is already taxed; a further £6,000 is carved out as PENP; and the rest of the relevant termination award may use the £30,000 exemption. Real calculations depend on exact dates, the trigger date and your last pay period — use your employer's figure in the calculator.

Does statutory redundancy become PENP?

No. Statutory redundancy pay is excluded from the relevant termination awards used for PENP. It still counts towards the combined £30,000 exemption with other qualifying awards, but it can't be reclassified as taxable notice pay.

Is PILON or PENP in the £30,000 exemption?

No — both are taxed as earnings before the exemption is applied. The order is:

1. Salary, holiday pay, bonus and PILON → taxable earnings
2. Calculate PENP → taxable earnings
3. Remaining qualifying termination awards
4. Apply the combined £30,000 exemption
5. Tax any termination award excess (Income Tax only — no employee NI)

PENP is subtracted from the relevant termination awards before the £30,000 threshold is applied.

National Insurance and student loans

PILON and PENP are earnings, so they can carry Income Tax, employee Class 1 NI, and student or postgraduate loan. If paid after you leave, the NI and loan deductions depend on the earnings period, not simply your annual income — for ex-employees, student loan uses the same amount and period as the employer's Class 1 NI calculation. See Tax on Redundancy Payments and the student loan guide.

Paid after your P45?

If PILON or PENP is paid after your P45, payroll usually applies an emergency 0T code (S0T in Scotland, C0T in Wales) on a non-cumulative basis, so the tax on the payslip can differ from your final annual tax. There's more in Tax on Redundancy Payments.

Edge cases

• Salary sacrifice — PENP basic pay uses pay before the sacrifice, so PENP can be higher than your taxable payslip salary suggests.
• Notice shorter than statutory — D can't use a notice period below the legal minimum.
• Summary dismissal — a lawful summary dismissal may mean no notice entitlement, so D can be zero; that can change if the dismissal is overturned or a settlement treats you as a good leaver.
• Fixed-term contracts & internationally mobile employees — extra rules apply; take professional advice.