What does PILON mean?

PILON stands for Pay In Lieu Of Notice. It means your employer pays you a lump sum instead of making you work through your notice period. Your employment ends immediately and you get the money you would have earned during your notice.

Yes. PILON is taxed as normal earnings, just like your salary. It does not count towards the £30,000 tax-free allowance for redundancy payments. This is the case regardless of whether your contract includes a PILON clause.

Is PILON better than working my notice?

It depends on your situation. PILON gives you money now and frees you to start a new job immediately. But working your notice (or getting garden leave) means your pension, health insurance, and other benefits continue running. In some cases, garden leave is worth more overall.

What Is PILON and How Is It Taxed?

PILON is one of those terms HR throws around like everyone knows what it means. If you're nodding along while quietly Googling it, you're not alone.

PILON stands for Pay In Lieu Of Notice. It means your employer pays you a lump sum instead of making you work your notice period. Your employment ends straight away and you get the money you would have earned during notice.

It sounds straightforward, but the tax treatment catches a lot of people out.

How PILON works

When you're made redundant, you're entitled to a notice period. This is either the notice period in your contract or the statutory minimum, whichever is longer.

Statutory minimum notice is one week per year of service, up to a maximum of 12 weeks (ERA 1996, s.86). So if you've been there 8 years, you're entitled to at least 8 weeks' notice.

Your employer has three options for handling your notice:

Working notice. You carry on working as normal until your notice period ends. You get paid as usual, and your pension, health insurance, and other benefits keep running.

Garden leave. You stop working but stay employed until your notice period ends. You get paid as normal and your benefits continue. You just don't come into the office. This is often the best option financially.

PILON. Your employment ends immediately and you get a lump sum covering what you would have earned during your notice. Quick and clean, but there are downsides.

How PILON is taxed

This is where it gets important. Since April 2018, all PILON payments are taxed as normal earnings. The tax rules changed under something called Post-Employment Notice Pay (PENP) rules in ITEPA 2003, s.402D.

That means:

PILON is taxed like salary. Income tax and National Insurance are deducted as normal.
It does NOT count towards your £30,000 tax-free allowance. The £30,000 threshold only applies to redundancy pay and any extra goodwill payment. PILON sits outside it.
This applies even if your contract doesn't mention PILON. It used to matter whether there was a PILON clause in your contract. It doesn't anymore. All notice pay is taxed as earnings.

Why this matters for your redundancy package

If your employer bundles everything into one number without breaking it down, you could end up paying more tax than you need to.

Say your total package is £35,000. If it's all labelled as a termination payment, the first £30,000 is tax-free and you only pay tax on £5,000.

But if £10,000 of that is actually notice pay (PILON), then the breakdown should be: £10,000 PILON (fully taxed) plus £25,000 termination payment (fully tax-free, because it's under £30,000).

The total is the same, but the tax bill is different. Getting the breakdown right matters.

PILON vs garden leave vs working notice

Here's a simple comparison:

PILON gives you a clean break. You get the money, you leave, you can start a new job the next day. But your benefits stop immediately and the whole payment is taxed.

Garden leave is often better. You stay employed, which means your pension contributions continue, your health insurance stays active, and you keep building up holiday. You just don't have to go to work. The downside is you usually can't start a new job until it ends.

Working notice is similar to garden leave financially, but you have to keep showing up. The upside is it looks better on your CV (no unexplained gap) and you keep all your benefits running.

If you have a choice, garden leave is usually the best deal. But it depends on your situation. If you've already got a new job lined up, PILON might suit you better.

What to check

Does your contract have a PILON clause? If it does, your employer can end your employment immediately and pay you off without breaching your contract. If it doesn't, technically they should let you work your notice or put you on garden leave. In practice, most employers pay PILON anyway, but it's worth knowing where you stand.

Is the PILON calculated correctly? It should be based on your basic salary for the notice period. Some employers try to exclude benefits, bonuses, or pension contributions. If your contract says your notice period pay includes these things, push back.

Is it separated from your redundancy pay? Make sure your payslip or settlement agreement clearly breaks down which part is redundancy pay (tax-free up to £30,000) and which part is PILON (taxed as earnings). If it's all lumped together, you or your solicitor should ask for a proper breakdown.

This article is general guidance about UK redundancy rights. It's not legal advice and shouldn't be treated as a substitute for advice from a qualified employment solicitor.