Understanding Payment in Lieu of Notice: A Must-Read Guide

If you’ve been offered payment in lieu of notice, or need to calculate it, understanding how it works is crucial. This guide will navigate you through the legalities and calculation methods, ensuring you’re equipped to handle this immediate financial compensation confidently. Expect clear insights without the legal jargon – just practical information tailored to your needs. Often obtaining a payment in lieu of notice (also referred to as a PILON) is the first aim when negotiating an exit (this means you get your full notice pay, but are not required to work your notice period).

Payment in Lieu of Notice: Key Takeaways

  • Payment in Lieu of Notice (PILON) is compensation to employees for not working their notice period, and it must be correctly calculated based on the employee’s salary and included in employment contracts to avoid legal issues.
  • Employers may find PILON advantageous for immediate terminations, particularly in sensitive situations, but it requires careful management to avoid tax implications and potential breach of contract claims.
  • PILON differs from statutory and contractual notice pay, and while termination payments up to £30,000 are tax-exempt, a PILON is subject to both income tax and NICs, with PENP often being a critical factor in tax calculations.
  • If you receive a payment in lieu of notice, the employment relationship will come to an end sooner than when working your notice.
  • It is important to understand the notice period you are entitled to, which will require a review of your employment contract and an understanding of the statutory minimum notice period (which is based on your length of service).

Defining Payment in Lieu of Notice (PILON)

Payment in Lieu of Notice

Payment in Lieu of Notice (PILON) is a payment made to employees instead of requiring them to work during their notice period. 

The calculation of PILON is based on the employee’s salary, whether it is paid monthly or hourly. However, keep in mind that PILON is not considered pensionable, which can have implications on the overall benefits an employee may receive post-dismissal. 

The Role of Employment Contracts

Employment contracts should set out PILON eligibility by specifying under what conditions employees are entitled to PILON. The calculation should detail the terms of payment, including basic pay and other possible benefits. If the employment contract does not make provision for a PILON, the parties can still agree for this to take place.

However, without a PILON clause, employers cannot terminate the contract immediately without serving the notice period (unless there is another reason to do so, such as a dismissal for gross misconduct). This can risk breach of contract claims and make post-termination restrictions unenforceable. Therefore, a clearly stated PILON clause should define when the payment is to be made, and employers may ask employees to agree to payment in lieu if there’s no clause present. Most employees would agree to receive a payment in lieu of notice, because it means they get the pay without having to work (it just means their employment will end sooner than if they had to work their notice period).

Statutory vs. Contractual Notice Periods

The difference between statutory and contractual notice periods is fundamental for calculating PILON. Statutory notice is the legal minimum notice period an employee is entitled to receive, whereas the contractual notice period may specify a period that is longer, but not shorter, than the statutory minimum. If the contract contains a notice period that is shorter than the statutory minimum, then the statutory minimum is what the employee is entitled to.

The statutory notice period is contingent on the employee’s duration of service, ranging from one week for employment between one month and two years to twelve weeks for twelve years of service or more. The statutory minimum notice period only goes up to 12 weeks, meaning if you had 20 years of service (for example) the statutory minimum notice period would still be 12 weeks (the parties can agree to a longer notice period in the employment contract). When giving one week’s notice, an employee is entitled to full normal pay during their notice period, also known as notice period pay. However, if the excess is more than a week, the employee is only entitled to the appropriate pay for the reason they are off work, such as statutory sick pay, while they remain technically employed.

Determining if the notice period is statutory or contractual is essential to calculate what payment should be paid. 

PILON And Redundancy/Compensation Payments

When employment ends, there are various payments that may apply.

The applicable notice pay is usually the first payment to tackle, which is a taxable payment.

In contrast, statutory redundancy pay (or “termination payments) are tax-free up to £30,000.

PILON Versus Garden Leave: Key Differences

PILON involves immediate termination of employment and payment in lieu of notice (so the notice period is paid up front and the employment ends).

Garden leave is when the employee remains employed but stays away from the workplace, so the employment relationship is continuing. During garden leave, the employee is usually expected to be available for work if needed.

In short, with a payment in lieu of notice, the employment relationship will end, but with garden leave, the employment relationship will continue until the expiry of the garden leave – the common practical consideration is that if on garden leave, you are unlikely to be able to commence a new job because your employment has not yet ended.

Employers might opt for PILON over garden leave when they wish to end the employment relationship immediately, particularly when there is a high risk of sensitive information leakage or the employee’s role is non-central to business operations. On the other hand, garden leave serves to protect business interests by preventing employees from joining competitors or soliciting clients during the notice period. Understanding these differences can help decide which option is best for their specific circumstances.

Calculating PILON: Guide

There are four types of PILON:

  1. Contractual PILON (where there is an express (or occasionally an implied) term in the contract – for example, where the contract says notice pay must be a PILON).
  2. Automatic PILON (where payment is made as an automatic response by the employer to a dismissal).
  3. Discretionary PILON (where payment is made under a discretionary power in the contract – so the contract will give the employer a discretion as to make a PILON or not).
  4. PILON paid as compensation for breach of contract.

Calculating PILON will first require a review of the employment contract. The contract can set out what payments the employee is entitled to, such as how the PILON is to be calculated (for example, if basic pay only is due or if other benefits should be included).

If a PILON is made and there is no provision to do so in the contract, the value of the PILON should be equal to what the employee would have received if they were given their full notice (if there were any relevant benefits, these should be included).

All payments made in lieu of notice are taxable earnings.

Taxation and PILON

Taxation is a critical aspect of PILON payments. Both contractual and non-contractual PILON payments are subject to income tax and National Insurance contributions, with intricate rules governing the calculations.

The post-employment notice pay (PENP) calculation factors in basic pay an employee would have received during the notice period, creating a taxable amount which is to be deducted from relevant termination awards. As the employer pays, they are obliged to handle Class 1 National Insurance Contributions on PILONs, and they are liable to pay Class 1A NICs on amounts over the £30,000 threshold.

There is a £30,000 non-taxable exemption for termination payments (which are not PILON); however, contributions to a registered pension scheme as part of a termination payment are exempt from tax and national insurance, provided they don’t exceed the Annual Allowance.

Settlement Agreements and PILON

Settlement agreements often include payment in lieu of notice (PILON), and this is usually a key term of a settlement agreement that is negotiated (most employees when leaving a business via a settlement agreement would prefer a PILON than having to work their notice).

The inclusion of PILON clauses in settlement agreements allows employees to leave immediately after the termination date so they can (hopefully) begin looking for new employment as soon as possible.

Best Practices for Managing PILON in the Workplace

Managing PILON effectively in the workplace requires a sound understanding of best practices. Employment contracts should include a PILON clause that is clear and unambiguous to ensure legal compliance and avoid confusion. Clarity within the contract on what PILON payments entail, how they are calculated, and when they are given is important. If the documents are not clear however, it may give more scope to negotiate the outcome you most want.

If you are a departing employee, you will want to ensure your PILON payment does not shortchange you and that you are receiving all your other entitlements.

Legal Support and Expert Advice on PILON

Legal assistance and specialist advice on PILON are essential.

Employment law specialists provide essential support when dealing with PILON-related matters. 


This exploration of PILON has shed light on its various aspects, from its definition and calculation to its legal implications and best practices. While PILON can be a useful tool in managing immediate exits and reducing costs, it also carries potential risks that must be managed effectively. Clear employment contracts, accurate calculations, and supportive termination processes can help ensure a smooth transition for both employers and employees. Remember, when it comes to PILON, understanding is the first step toward effective management (the first place to check is your employment contract).

Frequently Asked Questions

How does payment in lieu of notice work?

Payment in lieu of notice allows an individual’s employment to be terminated immediately, where they receive their notice pay upfront, but are not required to work (the amount of the PILON will depend on the type of PILON, the contractual wording or what is agreed).

How much tax will I pay on my PILON?

You will pay tax and National Insurance on your PILON, which are treated as earnings. 

How is PILON calculated?

PILON is calculated with reference to the employment contract. You will need to make sure you are being paid all entitlements and not just basic pay, which may depend on the type of PILON and contractual wording.

What is the difference between PILON and garden leave?

The main difference between PILON and garden leave is that PILON involves termination of employment and immediate payment, while garden leave allows the employee to remain employed but stay away from the workplace.

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