Payment in lieu of notice, usually shortened to PILON, is a lump sum your employer pays so your employment ends straight away instead of you working through your notice period. You get the wages (and sometimes the benefits) you would have earned during that notice, and the job is over the day the payment is made. It is a standard feature of UK employment law, and how it works in your case depends heavily on what your contract says.
How the Payment Ends the Job
The mechanics are simple. Your employer tells you your employment is ending, hands over a payment covering the notice period, and you leave that day. You don’t return to your desk, finish projects, or train a replacement. The employment relationship is over the moment the PILON is agreed or the clause is exercised.
Employers tend to reach for PILON when they want a clean break: sensitive commercial information, client relationships that could walk out with you, or simply a wish to avoid a drawn-out goodbye. For you, the appeal is obvious. You get paid without doing the work, and you can start looking for your next role immediately.
The Notice Period the Payment Replaces
To know what PILON is worth, you need to know the notice period it stands in for. UK law sets statutory minimums based on length of service:
- One month to two years of service: at least one week’s notice.
- Two to twelve years: one week per completed year, so five years of service means five weeks.
- Twelve or more years: twelve weeks, the statutory maximum.
These minimums come from the Employment Rights Act 1996.1Legislation.gov.uk. Employment Rights Act 1996, Section 86 Your contract can set a longer period, and many senior or professional roles do; three or six months is common at management level. When PILON is triggered, the payment covers whichever notice period applies, statutory or contractual, whichever is longer.
Does Your Contract Have a PILON Clause?
Whether your employer can simply pay you off and send you home turns on one thing: whether your contract contains a PILON clause. This is where most confusion starts.
With a PILON Clause
If your contract lets your employer make a payment instead of requiring you to work your notice, the employer can exercise that right unilaterally. You don’t have to agree. The payment satisfies the contractual obligation. The wording matters: some clauses cover basic salary only, others extend to benefits.
Without a PILON Clause
If there is no PILON clause and your employer pays you off instead of letting you work your notice, that is technically a breach of contract.2HM Revenue & Customs. Employment Income Manual – EIM13880 The employer is failing to provide the work and benefits promised for the notice period, and the payment is treated as damages for that breach rather than normal pay. An employer cannot force you to accept PILON if your contract doesn’t provide for it, and you could bring a breach of contract claim in an employment tribunal if you are dismissed before your notice period ends.3Acas. When an Employee Does Not Have to Work Notice
What the Payment Covers
The contents of a PILON payment depend almost entirely on the wording of the clause. At minimum, expect basic salary for the full notice period. Beyond that, it gets fiddly.
If the clause says “basic salary,” that is all you get. No car allowance, no private medical, no pension contributions for the notice period you aren’t working. If it says “salary and all contractual benefits” or similar, the employer has to calculate the cash value of every perk you would have received and include it. Common items that sit in this grey area include employer pension contributions, private medical cover, company car benefits, and accrued commission.
Holiday pay is separate. Any holiday you have already accrued but not taken must be paid out as its own legal entitlement, not folded into PILON. You generally won’t accrue new holiday for the notice period you didn’t work, because your employment ended on the PILON date.
Arguments about what should be included are one of the most common flashpoints in PILON situations. If an offer looks thin, compare it line by line against the PILON clause and the benefits section of your contract before signing anything.
How PILON Is Taxed
Tax is where PILON catches people out. A widespread misconception is that PILON is tax-free up to £30,000, the same as a statutory redundancy payment. That has not been true since April 2018.
Post-Employment Notice Pay
Since April 2018, all PILON payments are subject to income tax and Class 1 National Insurance, whether the payment is contractual or non-contractual.4GOV.UK. Income Tax and National Insurance Contributions – Treatment of Termination Payments HMRC uses a formula called Post-Employment Notice Pay (PENP) to work out how much of any termination package counts as notice pay and is therefore taxed as normal earnings.
The PENP Formula
The calculation under section 402D of the Income Tax (Earnings and Pensions) Act 2003 is:5Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 402D
PENP = (BP × D ÷ P) − T
- BP: your basic pay in the last pay period before the termination trigger date.
- D: the number of calendar days in the notice period you didn’t work.
- P: the number of calendar days in your last pay period (or 1 where you are paid monthly with a whole-month notice period, or 30.42 in other monthly-pay situations).
- T: any other termination-related payments already taxed as earnings.
The result is what HMRC treats as earnings. Your employer deducts income tax and NICs from that portion through payroll, just like a normal paycheque. If the formula produces a negative number, the PENP is treated as zero.2HM Revenue & Customs. Employment Income Manual – EIM13880
Where the £30,000 Exemption Still Applies
The £30,000 tax-free threshold hasn’t disappeared, it just doesn’t apply to the PILON portion. If your termination package includes amounts on top of the PENP figure, for example an ex gratia payment, enhanced redundancy pay, or compensation for loss of office, the first £30,000 of those additional amounts can still be paid free of income tax. Anything above £30,000 in that category is taxable and also attracts employer-only Class 1A National Insurance. Your employer runs the PENP calculation and separates the taxable notice pay from any amounts that qualify for the exemption.
PILON Compared With Garden Leave
Garden leave and PILON both keep you away from the office during your notice period, but the legal mechanics are different, and the difference has real consequences.
On garden leave you are still employed. Your contract is still running. Salary keeps arriving on the normal pay dates, pension contributions continue, holiday keeps accruing, and you remain bound by confidentiality and exclusivity. Your employer can require you to be available during working hours and can technically call you back in. You cannot start working for anyone else.
With PILON, employment is over. You get a lump sum, hand back the laptop, and you’re free. You can start a new job the next day. The trade-off is that pension contributions stop, benefit coverage ends, and holiday stops accruing from the termination date. Any accrued but untaken holiday is paid out separately.
Restrictive Covenants
If your contract contains non-compete or non-solicitation clauses, PILON affects when they run. These restrictions usually begin on the termination date, and with PILON that is the day you leave, not the date your notice period would have ended if worked out.
That cuts both ways. Your employer gets less time protected by post-termination covenants than they would have had by keeping you on garden leave through the notice period plus the covenant period afterwards. You get the restrictions expiring sooner, so you can compete or approach former clients earlier.
Can You Refuse or Negotiate?
Your leverage depends on the contract. If there is a PILON clause, the employer can generally insist on exercising it. Your room to argue is mostly about the calculation, particularly whether the payment properly reflects all contractual benefits.
If there is no PILON clause, the picture changes. The employer needs your agreement to end the employment early. You can refuse and insist on working your notice, and if the employer dismisses you anyway, that is a breach of contract you can take to a tribunal.3Acas. When an Employee Does Not Have to Work Notice In practice, that gives you negotiating room. Employers in this position often agree to enhanced terms, such as paying for benefits through the notice period, topping up the lump sum, or waiving restrictive covenants, to get your signature on a settlement agreement.
Whether you would actually want to refuse is a separate question. If you have another job lined up, being paid to leave immediately is hard to beat. If you don’t, staying on the payroll through your notice period keeps benefits running and gives you longer to job-hunt while still employed. The right answer depends on your circumstances.