Pay in lieu of notice (PILON): what it means and how it is taxed

What is pay in lieu of notice (PILON)?

Payment in lieu of notice, or PILON, is a payment your employer makes instead of requiring you to work your notice period. Employment ends immediately, and you are paid a lump sum equivalent to the salary and benefits you would have received had you worked your notice in full.

PILON is common wherever an employer wants a clean break rather than a working notice period, including redundancies, dismissals and exits agreed through asettlement agreement. It is usually shown as its own line on your termination statement, separate from any redundancy or ex-gratia payment.

Is PILON taxable?

Yes. Since 6 April 2018, all payments in lieu of notice count as earnings for tax and National Insurance under the Post-Employment Notice Pay rules in section 402B of ITEPA 2003. This applies whether or not your contract has a PILON clause, and PILON never qualifies for the £30,000 tax-free termination payment exemption.

Before 2018, some employers avoided tax and National Insurance on notice pay by structuring it as a non-contractual PILON. The Post-Employment Notice Pay (PENP) rules closed that route: a set formula insection 402B of ITEPA 2003 works out the taxable notice element regardless of how the payment is labelled. In a settlement agreement, PILON is one of the taxable elements alongside salary, holiday pay and bonuses, and sits apart from the tax-free portion of a genuine termination payment. See oursettlement agreement tax guide for how the full payment is usually split.

When should pay in lieu of notice be paid?

There is no single statutory deadline, but PILON is normally paid promptly on or shortly after your termination date, usually processed through payroll in the normal way. If you are leaving under a settlement agreement, the agreement itself should set out exactly when the payment will be made and how it is taxed.

If your contract or settlement agreement is silent on timing, or the payment is significantly delayed beyond your normal pay date, that is worth raising with your employer directly, or having checked as part of a wider review of your settlement agreement.

Contractual vs non-contractual PILON

If your contract contains a PILON clause, your employer can lawfully end your employment straight away and pay you in lieu, without breaching your contract. Without a clause, ending employment immediately is technically a breach of contract, though the payment made usually still resolves the position and settles any claim arising from that breach.

The presence or absence of a PILON clause used to matter for tax as well, but the PENP rules removed that distinction: both contractual and non-contractual PILON are taxed the same way. Where it still matters is for restrictive covenants and post-termination obligations, which a contractual PILON clause can preserve more cleanly than an ad hoc payment.

PILON vs garden leave: what is the difference?

With PILON, your employment ends immediately and you receive a payment instead of working your notice. On garden leave, you remain employed and continue to be paid throughout your notice period, but your employer asks you to stay away from work rather than attend or perform your usual duties.

Because garden leave keeps you employed, your benefits, pension accrual and any restrictive covenants generally continue until your notice period ends, and you usually cannot start a new job until you leave. PILON ends all of that on day one, in exchange for the certainty of an immediate lump sum. See ournotice period guide for how statutory and contractual notice periods are worked out, and ourgarden leave guide for more detail on how that alternative works.

PILON: frequently asked questions