Payment in lieu of notice (PILON) is a lump-sum payment made to an employee instead of requiring them to work their notice period. The rules depend on whether a PILON clause exists in the employment contract.
Contractual PILON
If the contract includes a PILON clause, the employer can make the payment and end employment immediately. This is a contractual right — the employer is acting within the contract terms. The payment:
- Is fully taxable through PAYE as normal earnings
- Is subject to National Insurance contributions
- Usually covers basic pay only (unless the clause specifies otherwise)
- Is not a breach of contract
Non-Contractual PILON
If there is no PILON clause and the employer pays in lieu without the employee's agreement, this is technically a breach of contract — even though the employee receives a payment. The employee could potentially claim for additional benefits they would have received during the notice period (e.g., pension contributions, company car).
Tax Treatment
Since April 2018, all PILONs are treated as follows:
- "Post-employment notice pay" (PENP) — the basic pay element is always taxable and subject to NI, whether or not there's a contractual clause
- Any amount above PENP may qualify for the £30,000 tax-free exemption for termination payments
Best Practice
- Include a clear PILON clause in all employment contracts
- Calculate PILON accurately, including any contractual benefits
- Confirm the arrangement in writing
- Ensure garden leave clauses are considered as an alternative
Our contracts and handbooks team can draft or review your PILON clauses. Get in touch.