Pay in Lieu of Notice UK: How PILON Is Calculated and What You Are Owed

Pay in lieu of notice (PILON) is a payment your employer makes when your employment ends immediately instead of you working through your notice period. The amount is typically your basic salary for the notice period you would have worked, though the exact calculation depends on your contract and whether a PILON clause exists. An employee on £40,000 with four weeks' notice would typically receive approximately £3,077 in PILON before tax.

This guide explains how PILON is calculated, how it is taxed, the difference between contractual and non-contractual PILON, and how it compares to garden leave. Use our notice period calculator to work out your statutory or contractual notice entitlement.

What is pay in lieu of notice?

When employment ends, either party must normally give notice. If your employer decides you should leave immediately rather than work your notice, they can make a payment in lieu of notice to compensate you for the income you would have earned during that period. Your employment ends on the date of dismissal, not at the end of the notice period.

PILON is common in redundancies, dismissals, and negotiated exits. It allows both parties to move on without the employee attending work during the notice period. The payment replaces the salary, and sometimes benefits, you would have received had you continued working.

PILON is distinct from garden leave, where you remain employed and bound by your contract but are not required to attend work. During garden leave, you continue to receive salary and benefits as normal. With PILON, employment terminates immediately and you receive a lump sum instead.

For more on notice period rights under UK employment law, see our UK notice period employment law guide. For the alternative arrangement where you stay employed but do not work, read our garden leave explained guide.

How PILON is calculated

The starting point for PILON calculation is your notice period and your basic salary. Divide your annual salary by 12 to get a monthly figure, or by 52 for a weekly figure, then multiply by the number of months or weeks of notice owed.

An employee earning £48,000 per year with a contractual notice period of one month receives PILON of £4,000 (£48,000 divided by 12). An employee on the same salary with three months' notice receives £12,000. These figures represent basic salary only unless the contract specifies otherwise.

Whether bonuses, commission, pension contributions, and benefits are included depends entirely on the contract and the circumstances of the dismissal. Some contracts include a PILON clause that limits the payment to basic salary only. Others are silent, which can create disputes about what should be included.

Statutory vs contractual notice

Your statutory minimum notice period depends on length of service. Between one month and two years of employment, the minimum is one week. After two years, it is one week per complete year of service, capped at 12 weeks. Your contract may require longer notice than the statutory minimum.

If your employer dismisses you without the required notice and without a valid PILON clause, you may have a claim for wrongful dismissal. The damages would be the salary and benefits you would have received during the notice period. If a valid PILON clause exists, the employer can end employment immediately by making the payment specified in the clause.

Use the notice period calculator to determine your statutory minimum based on years of service, then check your contract for any longer contractual notice period.

Contractual PILON clauses

Most modern employment contracts include a PILON clause giving the employer the right to terminate employment immediately by making a payment in lieu of notice. The clause typically specifies that the payment covers basic salary only, excluding bonuses, commission, and benefits.

A well-drafted PILON clause protects the employer from wrongful dismissal claims when ending employment without notice. It also gives certainty to the employee about what they will receive. Without a PILON clause, an employer who dismisses without notice may owe full damages for the entire notice period, including benefits and bonus entitlements that would have accrued.

If your contract does not contain a PILON clause and your employer dismisses you without notice, you may be entitled to more than basic salary for the notice period. Courts have awarded damages including pension contributions, private health insurance, car allowance, and anticipated bonus payments in cases where no PILON clause limited the employer's liability.

Tax treatment of PILON

PILON is subject to income tax and National Insurance contributions through PAYE, the same as normal salary. Your employer deducts tax at your marginal rate before paying you. There is no special tax exemption for PILON payments, unlike the first £30,000 of genuine redundancy payments which can be tax-free.

This distinction matters in redundancy situations. A redundancy payment compensating for job loss may include up to £30,000 tax-free. A PILON payment for notice not worked is always taxable. Employers sometimes structure termination packages to separate genuine redundancy compensation from PILON, but HMRC scrutinises these arrangements closely.

If your employer pays PILON without deducting tax correctly, you remain liable for the tax. HMRC can pursue you for underpaid tax if the payment was processed incorrectly. Always check your P45 and final payslip to confirm tax has been deducted properly.

PILON and the £30,000 redundancy exemption

The £30,000 tax-free threshold applies to genuine redundancy payments, not to PILON. If your termination package includes both a redundancy payment and PILON, only the redundancy element (up to £30,000) qualifies for tax exemption. The PILON portion is fully taxable.

Employers sometimes label a payment as "ex gratia" or "redundancy compensation" when it is effectively PILON. HMRC may reclassify such payments if they determine the payment relates to notice rather than genuine redundancy compensation. The label on the payment does not determine its tax treatment; the substance does.

PILON vs garden leave

Garden leave and PILON achieve a similar practical outcome: you stop working but receive income for the notice period. The legal and financial differences are significant.

During garden leave, you remain an employee. Your contract continues, you receive salary and benefits as normal, and you are bound by restrictive covenants such as non-compete clauses. You cannot start a new job until the garden leave period ends, unless your employer agrees otherwise.

With PILON, employment ends immediately. You are free to start a new job the next day. Restrictive covenants in your contract may still apply for a defined period after termination, but you are no longer on the payroll. You receive a lump sum rather than ongoing monthly salary.

From a tax perspective, garden leave salary is taxed monthly through PAYE as usual. PILON is taxed as a lump sum in the month of payment, which can push you into a higher tax bracket for that month if the payment is large. This is usually corrected through your tax code or a rebate in the following tax year.

PILON in redundancy situations

In a redundancy, your employer may offer PILON as part of the termination package. You might be offered pay in lieu of working your notice period, plus a statutory or enhanced redundancy payment. Each element is calculated and taxed separately.

Statutory redundancy pay is calculated based on age, length of service, and weekly pay (capped at £719 per week for 2025/26). It is tax-free up to £30,000 when combined with any other redundancy compensation. PILON is not part of this tax-free amount.

Some employers offer enhanced redundancy terms that include full notice pay plus an additional redundancy payment. Always ask for a written breakdown showing the PILON element, the redundancy element, and how tax will be applied to each.

What to check in your termination package

When you receive a termination offer including PILON, review the following before accepting. Confirm the notice period used in the calculation matches your contractual entitlement, not just the statutory minimum. Check whether the payment includes basic salary only or also covers pension contributions, car allowance, and other benefits.

Verify that tax and National Insurance will be deducted correctly. Ask whether the payment will be made as a single lump sum or split across what would have been your remaining pay dates. Confirm the exact termination date, as this affects your P45, benefit entitlements, and when restrictive covenants begin.

Check whether accepting the package requires you to sign a settlement agreement (formerly a compromise agreement). Settlement agreements waive your right to bring employment tribunal claims. You must receive independent legal advice for the agreement to be valid, and your employer should contribute to the cost of that advice.

Employee rights when PILON is not offered

If your employer dismisses you without notice and without making a PILON payment, and your contract does not contain a valid PILON clause, you may have a claim for wrongful dismissal. The damages are the net value of what you would have earned during your notice period, including salary and contractual benefits.

Wrongful dismissal claims are brought in the civil courts or employment tribunal, depending on the value. The employment tribunal limit for breach of contract claims is £25,000. Claims above this threshold go to the county court. You generally have three months minus one day from the date of dismissal to bring a tribunal claim.

If your employer has a PILON clause but pays less than the contract specifies, you can claim the shortfall as a breach of contract. Keep all correspondence, your contract, payslips, and the termination letter as evidence.

Worked example: calculating PILON

Sarah earns £52,000 per year and has worked for her employer for six years. Her contract specifies three months' notice. Her employer makes her redundant and exercises the PILON clause, ending her employment immediately.

PILON calculation: £52,000 divided by 12, multiplied by 3 months equals £13,000. This is her basic salary for the notice period. Her contract's PILON clause excludes bonuses and benefits, so her annual bonus and pension contributions are not included.

Sarah also receives statutory redundancy pay. At six years' service, aged 38, her weekly pay is £1,000 (below the £719 cap, so £719 is used). Statutory redundancy is 6 years multiplied by 1 week's pay at her age bracket (1 week per year aged 22 to 40), giving £4,314. This is tax-free.

Total package: £13,000 PILON (taxable) plus £4,314 statutory redundancy (tax-free). After tax and NI on the PILON at basic rate, Sarah receives approximately £10,400 from the PILON plus £4,314 redundancy, totalling around £14,714.

Negotiating PILON in settlement agreements

If you are negotiating an exit, PILON is often one element of a broader package. You may be able to negotiate enhanced terms, such as full notice pay including benefits rather than basic salary only, or a longer notice period than your contract requires.

Employers sometimes agree to structure part of a termination payment as an ex gratia payment rather than PILON, which can have tax advantages if it falls within the £30,000 redundancy exemption. However, HMRC rules on this are strict, and reclassification is not guaranteed to succeed.

If you believe your employer has miscalculated PILON or is not offering what your contract entitles you to, seek advice from an employment solicitor before signing any settlement agreement. The cost of legal advice is often covered by your employer as part of the settlement process.

Key takeaways

PILON replaces your salary for the notice period when employment ends immediately. The calculation is usually basic salary for the notice period owed, but contract terms vary. PILON is always taxable, unlike genuine redundancy payments up to £30,000. A valid PILON clause in your contract allows your employer to end employment without notice by making the specified payment.

Calculate your notice entitlement with the notice period calculator, check your contract for PILON terms, and always request a written breakdown of any termination package before accepting.