Pilon Calculator

Table of contents

• What is the PILON Calculator?
• How gross PILON entitlement, HMRC PENP rules, Income Tax, and National Insurance are calculated
• Example Calculation: A £42,000 salary with a 3-month unworked notice period
• HMRC PENP Rules: Post-Employment Notice Pay formula, tax treatment, and the £30,000 exemption limit
• PILON vs Redundancy Pay vs Garden Leave: Employment rights and tax liabilities explained
• The Essential UK PILON & Severance Payment Audit Checklist
• How to use the PILON Calculator
• Frequently Asked Questions (FAQs)

Use this PILON Calculator to calculate Pay in Lieu of Notice (PILON) entitlements, evaluate HMRC Post-Employment Notice Pay (PENP) tax treatment, estimate PAYE Income Tax and National Insurance deductions, and determine your final net take-home severance pay. When an employment contract ends without working out the full contractual notice period, employers often issue a lump-sum PILON payment. Navigating UK tax laws surrounding termination payments is essential, as HMRC PENP rules strictly govern which portions of a settlement package are subject to standard tax and National Insurance versus the statutory £30,000 tax-free redundancy allowance.

What is the PILON Calculator?

The PILON Calculator is a specialized UK employment termination and tax analysis tool designed to help employees, HR professionals, and legal advisors calculate net severance pay, model contractual notice settlements, and ensure full HMRC tax compliance.

By entering your basic annual salary in British Pounds (£), selecting your contractual notice period (1, 3, 6, or 12 months), inputting any notice months actually worked, and selecting your marginal Income Tax band (Basic 20%, Higher 40%, or Additional 45%), this tool calculates gross PILON pay entitlement, estimated PAYE Income Tax, employee National Insurance contributions, and your estimated net take-home payment.

How gross PILON entitlement, HMRC PENP rules, Income Tax, and National Insurance are calculated

The calculator evaluates termination pay liabilities by determining unworked notice months, calculating gross PILON pay, and applying standard PAYE Income Tax and National Insurance thresholds under Post-Employment Notice Pay (PENP) rules.

To maintain complete transparency, the tool follows these logical PILON calculation steps:

• Unworked Notice Duration Calculation:
  • Total notice required by contract is adjusted by any notice time worked in practice: Unworked Notice (Months) = Contractual Notice (Months) – Notice Worked (Months).
  • For example, a contractual notice period of 3 months with 0 months worked leaves 3 full unworked notice months.
• Gross PILON Pay Entitlement (£):
  • Gross PILON equals basic monthly salary multiplied by the unworked notice duration: Gross PILON (£) = (Basic Annual Salary (£) / 12) x Unworked Notice (Months).
  • On a £42,000.00 basic annual salary (£3,500.00/month), a 3-month unworked notice period results in a gross PILON pay entitlement of £10,500.00.
• HMRC PENP Tax & National Insurance Deductions:
  • Under HMRC PENP regulations, PILON payments are treated as standard earnings from employment rather than tax-free termination pay.
  • PAYE Income Tax: Deducted at your marginal income tax band (e.g. 20% Basic Rate on £10,500.00 equals £2,100.00).
  • Employee National Insurance: Deducted at standard Class 1 rates (8% Basic Rate on £10,500.00 equals £840.00; 2% for Higher and Additional rate earners).
• Estimated Net Take-Home PILON Pay:
  • Net pay is calculated by subtracting total tax and NI deductions from gross PILON entitlement: Net PILON Pay (£) = Gross PILON (£) – Income Tax (£) – Employee NI (£).
  • Deducting £2,100.00 Income Tax and £840.00 NI from a £10,500.00 gross PILON payment leaves a final net take-home sum of £7,560.00.

Example Calculation: A £42,000 salary with a 3-month unworked notice period

To observe how contractual notice requirements, unworked periods, and HMRC PENP tax rules determine net termination pay, consider this standard UK employment termination scenario.

Example: An employee earning a basic annual salary of £42,000.00 has a 3-month contractual notice period, leaves immediately without working notice (0 months worked), and falls within the 20% Basic Rate Income Tax band (8% Employee NI).

• Input Parameters:
  • Basic Annual Salary: £42,000.00
  • Contractual Notice Period: 3 Months
  • Notice Worked: 0 Months
  • Employee Marginal Tax Band: Basic Rate (20% Tax / 8% NI)
• Step-by-Step PILON Settlement Breakdown:
  • Basic Monthly Salary (£42,000 / 12): £3,500.00 / month
  • Unworked Notice Duration (3 – 0): 3 Months
  • Gross PILON Pay Entitlement (£3,500 x 3): £10,500.00 Gross
  • Less PAYE Income Tax Deduction (20%): -£2,100.00
  • Less Employee National Insurance (8%): -£840.00
  • Estimated Net Take-Home PILON Pay: £7,560.00 Net

The calculation demonstrates that a basic salary of £42,000.00 with a 3-month unworked notice period generates a gross PILON payment of £10,500.00, yielding £7,560.00 in net take-home severance pay after mandatory statutory tax deductions.

HMRC PENP Rules: Post-Employment Notice Pay formula, tax treatment, and the £30,000 exemption limit

HMRC introduced strict Post-Employment Notice Pay (PENP) rules to standardize how termination payments are taxed, ensuring notice pay cannot be disguised as tax-free redundancy compensation:

• The Core PENP Statutory Formula:
  • HMRC calculates PENP using the official statutory formula: PENP = (BP x D / P) – T.
  • BP (Basic Pay): Basic salary for the last full pay period prior to termination (excluding bonuses, overtime, or benefits in kind).
  • D (Unworked Notice Days): The number of days in the post-employment notice period that were unworked.
  • P (Pay Period Days): The number of days in the basic pay period (typically 30.42 days for monthly paid staff).
  • T (Taxable Notice Paid): Any contractual PILON amount already processed through payroll under standard PAYE tax rules.
• Tax and National Insurance Treatment:
  • Any portion of a termination payment identified as PENP is treated strictly as earnings from employment.
  • PENP is subject to standard PAYE Income Tax deductions, Employee National Insurance contributions, and Employer National Insurance contributions.
• Interaction with the £30,000 Tax-Free Exemption:
  • Under UK tax law, statutory or ex-gratia redundancy payments up to £30,000 are exempt from Income Tax.
  • However, the PENP portion of a settlement package must be calculated and taxed first. Only the remaining settlement funds after deducting PENP can qualify for the £30,000 tax exemption limit.

PILON vs Redundancy Pay vs Garden Leave: Employment rights and tax liabilities explained

Understanding how PILON compares to other termination mechanisms ensures clarity around employment rights and tax obligations:

• Pay in Lieu of Notice (PILON):
  • Payment made when an employer terminates employment immediately without requiring the employee to work their contractual notice period.
  • Treated as fully taxable employment income (subject to Income Tax and NI) under PENP rules.
• Statutory & Ex-Gratia Redundancy Pay:
  • Compensation awarded for job loss due to business closure, restructuring, or role redundancy.
  • Qualifies for the statutory £30,000 Income Tax exemption (though ex-gratia sums above £30,000 attract Employer NI).
• Garden Leave:
  • An arrangement where the employee remains legally employed throughout their notice period but is instructed not to attend work or contact clients.
  • The employee receives standard monthly salary and benefits via normal PAYE payroll operations throughout the leave period.

The Essential UK PILON & Severance Payment Audit Checklist

Following a systematic settlement audit ensures termination packages comply with HMRC PENP regulations:

✅ Employment Contract & Notice Verification

• Review Express Contractual PILON Clauses: Check employment contracts for explicit PILON clauses defining whether notice pay includes basic salary only or extends to benefits and bonuses.
• Confirm Unworked Notice Durations: Verify the exact number of unworked notice days or months to ensure accurate input into the HMRC PENP calculation.

✅ Statutory PENP & Tax Audit

• Execute the Official PENP Formula: Calculate PENP using HMRC’s BP x D / P – T statutory formula before applying any tax exemptions to settlement agreements.
• Apply Tax Code & NI Thresholds: Ensure PAYE Income Tax and Class 1 Employee NI are calculated accurately against the employee’s marginal tax bracket.

✅ Settlement Agreement & Exemption Allocations

• Isolate Redundancy Pay vs PENP: Clearly split the settlement breakdown on the compromise or settlement agreement into PENP (taxable) and genuine redundancy compensation (tax-free up to £30,000).
• Verify Employer National Insurance (Class 1A): Ensure the employer accounts for 13.8% Class 1A Employer NI on any non-PENP termination payments exceeding £30,000.

How to use the PILON Calculator

1. Basic Annual Salary (£): Input your basic gross annual salary (excluding bonuses, overtime, or benefits).
2. Contractual Notice Period: Select your contractual notice period (“1 Month”, “3 Months”, “6 Months”, or “12 Months”).
3. Notice Worked (Months): Enter the number of notice months actually worked in practice (enter 0 for immediate termination).
4. Employee Marginal Tax Band: Select your marginal Income Tax bracket (“Basic 20% Tax / 8% NI”, “Higher 40% Tax / 2% NI”, or “Additional 45% Tax / 2% NI”).
5. Review PILON Payment Summary: Examine the results panel to view your gross PILON pay entitlement, estimated PAYE Income Tax, employee National Insurance deductions, and final net take-home PILON payment.

Frequently Asked Questions (FAQs)

Is Pay in Lieu of Notice (PILON) subject to Income Tax and National Insurance?
Yes. Under HMRC Post-Employment Notice Pay (PENP) rules introduced in April 2018, all PILON payments are classified as standard earnings from employment. As a result, they are fully subject to PAYE Income Tax and Class 1 National Insurance contributions.

Does PILON count towards the £30,000 tax-free redundancy allowance?
No. The statutory £30,000 tax-free allowance applies only to genuine redundancy compensation or ex-gratia termination payments. HMRC requires PENP notice pay to be calculated and taxed first, with only remaining settlement funds qualifying for the £30,000 exemption limit.

How does HMRC calculate Post-Employment Notice Pay (PENP)?
HMRC calculates PENP using the statutory formula PENP = (BP x D / P) – T, where BP is basic pay for the last full pay period, D is unworked notice days, P is days in the basic pay period, and T is contractual notice pay already taxed.

What is the difference between PILON and Garden Leave?
With PILON, your employment contract terminates immediately, and you receive a lump-sum payment for your unworked notice period. On Garden Leave, you remain an active employee throughout your notice period, receiving standard monthly salary payments via normal PAYE payroll operations.

Sources

• GOV.UK HMRC – Official guidance on calculating Post-Employment Notice Pay (PENP) and termination liabilities
• ACAS (Advisory, Conciliation and Arbitration Service) – Employee rights regarding notice periods and PILON settlements
• GOV.UK Tax Rules – Official guidelines on redundancy payments, PENP rules, and the £30,000 tax exemption limit

This calculator provides estimated gross PILON entitlements and net settlement figures based on standard UK PAYE tax bands, National Insurance thresholds, and HMRC PENP guidelines. Final net termination pay depends on individual tax codes, cumulative year-to-date earnings, and formal settlement agreements.