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    TaxKilnUK tax guidance
    TaxKilnUK tax guidance

    Redundancy + termination → PILON + PENP formula

    PILON + PENP — Post-April 2018 Reform + Formula (ITEPA 2003 s.402D + HMRC EIM13880)

    Before 6 April 2018, only CONTRACTUAL PILON was automatically taxable; non-contractual PILON could fall within the £30,000 termination payment exemption. Finance (No. 2) Act 2017 ended that distinction — ITEPA 2003 s.402A-E now require ALL pay-in-lieu-of-notice slices to be taxed as ordinary employment income, regardless of whether the contract mentions PILON. The mechanism is the Post-Employment Notice Pay (PENP) calculation under s.402D: PENP = (BP × D) / P − T, where BP is basic pay in the last pay period; D is the number of unworked days in the minimum statutory or contractual notice period; P is the number of days in the last pay period; and T is the sum of any amounts already characterised as PILON in the termination package. Per HMRC EIM13880. The PENP slice is fully taxable (PAYE + employee NIC + employer NIC) and CANNOT use the £30,000 exemption.

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    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

    In plain English

    If your employer terminates without making you work your full notice, the part of any payment that represents the unworked notice period must be taxed as ordinary salary — even where the contract doesn't have a PILON clause and the payment is labelled 'compensation'. This rule has applied since 6 April 2018. The calculation that HMRC requires is called PENP — Post-Employment Notice Pay. The formula is in ITEPA 2003 s.402D and HMRC EIM13880: PENP = (BP × D) / P − T where: • BP = your basic pay in the last full pay period before notice was given • D = the number of days of statutory or contractual minimum notice that you did NOT work • P = the number of days in your last pay period (e.g. 30 or 31 for a monthly-paid worker) • T = anything in the termination package already explicitly described as PILON (to avoid double-counting) The PENP amount is taxed as employment income with PAYE, employee NIC and employer NIC — it cannot sit inside the £30,000 s.401 exemption. The rest of the termination package (true ex-gratia for loss of office, statutory redundancy, non-PILON enhanced redundancy) is then analysed under the s.401 regime as normal — first £30k tax-free, excess taxable at marginal rate but no employee NIC.

    How it works

    Why the rule changed (April 2018)

    Pre-April 2018, distinguishing contractual PILON (taxable) from non-contractual PILON (potentially within £30k exemption) created planning opportunities and HMRC disputes. The PENP regime removes the distinction — all unworked-notice-equivalent payments are taxed the same way, regardless of contract drafting.

    The PENP formula (s.402D / EIM13880)

    PENP = (BP × D) / P − T. BP is basic pay in the last pay period before notice was given — usually salary only; bonuses and most benefits in kind are excluded. D is the number of unworked days within the relevant notice period (statutory minimum under ERA 1996 s.86, or contractual minimum if longer). P is the number of days in the last pay period (commonly 30 or 31 for monthly paid). T is amounts in the package the employer has already labelled and taxed as PILON — included to avoid double-counting.

    Salary sacrifice trap

    BP is sometimes calculated by reference to pre-sacrifice salary in particular salary-sacrifice scenarios. HMRC's view in EIM13890+ has evolved; check the latest manual entry before relying on a sacrificed-salary calculation that produces a low PENP.

    Worked-notice scenario

    If the employee works the full statutory + contractual notice period before leaving, D = 0 and PENP is zero — no PENP charge on any ex-gratia package. This is why some leavers negotiate 'garden leave' (worked notice on full pay) rather than PILON — to preserve the £30k exemption headroom on the ex-gratia top-up.

    Interaction with statutory redundancy + £30k

    PENP comes off the top of the termination package before the s.401 / £30k regime applies. So: total package − (contractual amounts) − PENP = the s.401 slice, of which £30k is tax-free. Statutory redundancy stays inside the s.401 slice and counts towards the £30k cap.

    Who this applies to + key conditions

    Statute + manual references

    Primary: ITEPA 2003 sections 402A to 402E (inserted by Finance (No. 2) Act 2017) — Post-Employment Notice Pay (PENP) regime. s.402D contains the formula.

    Related: ITEPA 2003 s.401-416 — surrounding termination payment regime; Employment Rights Act 1996 s.86 — statutory minimum notice periods; Finance (No. 2) Act 2017 — introduced PENP and abolished Foreign Service Relief from 6 April 2018

    HMRC manual: EIM13874 (PENP overview); EIM13880 (formula and worked examples); EIM13890+ (special cases including monthly vs weekly pay periods, salary sacrifice)

    Common mistakes + traps

    Worked example

    Aisha, monthly-paid, basic salary £4,500/month, 6 months' contractual notice, employer terminates with no worked notice (full PILON)

    Aisha's termination package: £27,000 labelled 'compensation for loss of office' (no explicit PILON line). Her last pay period was 30 days (April).

    1. Step 1 — Identify D: 6 months' notice not worked. Assume D = 183 unworked days (6 months × roughly 30.5).
    2. Step 2 — Identify BP: £4,500 basic monthly salary.
    3. Step 3 — Identify P: 30 days (April).
    4. Step 4 — Identify T: zero — nothing in package explicitly labelled as PILON.
    5. Step 5 — Apply formula: PENP = (4,500 × 183) / 30 − 0 = 823,500 / 30 = £27,450.
    6. Step 6 — All £27,000 of the 'compensation' is reclassified as PENP (capped at the actual package value; HMRC does not impose PENP above what was actually paid). It is taxed as ordinary employment income with PAYE + employee + employer NIC.
    7. Step 7 — No £30k exemption is available because the entire £27,000 is PENP. If the package had been £40,000, then £27,450 would be PENP (PAYE + NIC) and the remaining £12,550 would fall into the s.401 slice — within the £30k cap and tax-free.

    Outcome: Aisha's £27,000 is taxed entirely as ordinary employment income via PENP — no £30k exemption applies. Net to Aisha depends on her marginal rate. A larger ex-gratia top-up beyond PENP would have qualified for the £30k cap.

    How this connects to the rest of the framework

    £30k exemption mechanics →

    PENP comes off the top; only the remainder qualifies for the £30k s.401 exemption.

    Settlement agreements →

    Settlement agreements must explicitly identify the PENP slice and tax it correctly via PAYE.

    Statutory redundancy calculation →

    Statutory redundancy is separate from PENP and is unaffected by it.

    Scenarios — 8 cases →

    Worked scenarios show PENP calculations for monthly-paid employees with varying notice periods.

    Frequently asked questions

    What happens if I miss the Self Assessment deadline?+
    The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.
    Do I need an accountant or can I file Self Assessment myself?+
    Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.
    How do payments on account work?+
    When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.
    What if my contract has a generous notice period that exceeds what was paid?+
    PENP uses the GREATER of statutory and contractual minimum notice. If the employer pays less than the relevant minimum's worth of compensation, PENP is capped at the actual payment — HMRC does not invent PENP above what was paid.
    Does PENP apply to redundancy pay?+
    Not directly — statutory redundancy is its own line. But the PENP analysis is run on the whole package, so if the employer characterises part of redundancy as 'in lieu of notice', that part is recharacterised as PENP.
    Can I avoid PENP by working garden leave?+
    Yes — working the full notice (whether at the desk or on garden leave) means D = 0 and PENP = 0. The ex-gratia top-up can then use the £30k exemption.
    Are bonuses included in BP?+
    Generally no — BP is basic salary in the last pay period before notice was given. Some BiKs may be included; see EIM13890+ for special cases.

    Free + regulated-body resources

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