How to Calculate PENP: Formula, Caps, and Worked Example

To calculate PENP, apply the statutory formula in section 402D of the Income Tax (Earnings and Pensions) Act 2003: PENP = ((BP × D) ÷ P) − T. Take the employee’s basic pay for the last pay period ending before the trigger date (BP), multiply by the number of unworked notice days (D), divide by the number of days in that pay period (P), then subtract any termination-related payments already taxed through payroll (T). The result is the slice of the termination award that must be taxed as earnings rather than benefiting from the £30,000 exemption.¹

BP: Basic Pay for the Last Pay Period

BP is the employee’s gross employment income for the last pay period ending before the trigger date. It is narrower than total pay. The statute strips out overtime, bonuses, commissions, gratuities, and allowances, along with benefits taxed under the benefits code (company cars, private medical insurance, and similar) and any employment-related securities or amounts connected to the termination itself.²

Car allowances are the frequent trap. Where the employee could have chosen a company car and took a cash allowance instead, HMRC generally treats the cash as an excluded allowance. Where no alternative was offered and the sum is simply labelled a car allowance, it may in reality be additional basic pay and belong inside BP.³

If a salary sacrifice arrangement is running, use the pre-sacrifice figure. BP is what the employee was entitled to before giving any up.²

D: Unworked Notice Days

D is the number of calendar days in the post-employment notice period. That period starts at the end of the employee’s last working day and runs to the earliest date the employer could lawfully have ended the contract by giving proper notice.⁴

Which notice period? The minimum notice the employer was required to give, taking the longer of contract and statute. A contract saying four weeks does not override a statutory entitlement of six weeks based on length of service, and using the shorter figure will undertax the PENP.⁵

P: Days in the Last Pay Period

P is the number of calendar days in the last pay period ending before the trigger date. For a monthly employee paid for 1 to 31 August, P is 31. For a fortnightly employee, P is 14.⁶

T: Termination Payments Already Taxed

T reduces the formula result by termination-connected payments already taxed as earnings through payroll. The usual entry here is a contractual PILON already run through PAYE. Holiday pay and bonuses payable on termination are specifically excluded from T, so they do not reduce PENP.⁷

The Trigger Date

Both BP and P depend on the trigger date, so identifying it correctly matters. If the employer gives notice, the trigger date is the day notice is given. If no notice is given, as in a mutual termination or summary dismissal, the trigger date is the employee’s last day of employment.⁵

Using the termination date as the trigger date when notice was actually given earlier shifts the last pay period, which in turn shifts BP and P and produces the wrong PENP.

Adjustments for Monthly Pay

Monthly pay creates a complication because months vary in length. The legislation offers two adjustments.⁸

Where the employee is paid monthly in equal instalments, the contractual notice period is a whole number of months, and the unworked notice period is also a whole number of months, then P is set to 1 and D is expressed in months. PENP becomes monthly basic pay multiplied by unworked months, less T.

Where monthly pay applies but the notice does not break into whole months, P is set to 30.42 (a statutory average month length) and D stays in calendar days. That stops the result from being distorted by whether the last pay period fell in a 28-day or 31-day month.

A Worked Example

An employee is paid £1,000 every two weeks (P = 14) with a contractual notice period of eight weeks. The employer ends the contract after three weeks of notice have been served, leaving 35 calendar days unworked (D = 35). The termination payment is £5,000. No contractual PILON has been taxed already, so T = 0.

BP × D = £1,000 × 35 = £35,000
÷ P = £35,000 ÷ 14 = £2,500
− T = £2,500 − £0 = £2,500

PENP is £2,500. That amount is taxed as earnings. The remaining £2,500 of the £5,000 payment can count towards the £30,000 exemption.

The Two Caps

Two safety valves sit inside the formula. If the calculation produces a negative number, PENP is treated as nil. If it produces a figure larger than the total termination award, PENP is capped at the total: the employee cannot be taxed on money never received.⁸

What Happens to the PENP Figure

The PENP amount is taxed as general earnings at the employee’s normal rate, with Class 1 National Insurance due from both employee and employer. The employer deducts these through PAYE.⁹

PENP is carved out before the £30,000 exemption applies. It never benefits from that threshold; only the balance of the termination award remaining after PENP has been removed can count towards the exemption.¹⁰ If the non-PENP portion exceeds £30,000, income tax applies to the excess and the employer owes Class 1A National Insurance on any amount above £30,000.¹¹

Statutory redundancy pay sits outside the PENP calculation entirely and counts towards the £30,000 exemption on its own terms.¹¹

Mistakes That Change the Number

The arithmetic is mechanical; the inputs are where errors happen.

Including a discretionary bonus in BP is the most common. It inflates the PENP figure and overtaxes the employee. Treating a car allowance as basic pay when the employee could have taken a company car instead produces the same effect.

Using the contractual notice period for D without checking the statutory minimum (one week per year of service, up to 12 weeks) undertaxes the PENP where statute is longer. The formula requires the greater of the two.⁵

Picking the wrong trigger date is less visible but equally damaging. If notice was given on 15 March and the employer uses 31 March instead, the last pay period feeding BP and P changes and the whole calculation shifts. When notice is given, the trigger date is the date notice is given, not the date employment ends.⁵

Forgetting T causes double taxation. A contractual PILON already processed through PAYE must be subtracted from the formula result. Skip that step and the employee pays income tax and NICs twice on economically the same money.⁷

1
HM Revenue & Customs. Employment Income Manual – EIM13880 – Post-Employment Notice Pay (PENP) Formula
2
HM Revenue & Customs. Employment Income Manual – EIM13882 – PENP Formula: How to Calculate BP
3
HM Revenue & Customs. Employment Income Manual – EIM13884 – PENP Formula: How to Calculate BP: Allowances
4
HM Revenue & Customs. Employment Income Manual – EIM13890 – PENP Formula: How to Calculate D
5
HM Revenue & Customs. Employment Income Manual – EIM13898 – PENP Formula: Defined Terms
6
HM Revenue & Customs. Employment Income Manual – EIM13888 – PENP Formula: How to Calculate P: Examples
7
HM Revenue & Customs. Employment Income Manual – EIM13896 – PENP Formula: How to Calculate T
8
legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 402D
9
GOV.UK. Changes to the Treatment of Termination Payments and Post-Employment Notice Pay for Income Tax
10
HM Revenue & Customs. Employment Income Manual – EIM13876 – Relevant Termination Awards: Post-Employment Notice Pay (PENP)
11
GOV.UK. Tax on Termination Payments: What You Pay Tax and National Insurance On