PILON: Payment in Lieu of Notice [Employee Guide]

Not every job ends with a farewell lunch and a few weeks’ notice. In many cases, it suits both sides to part ways quickly. That’s where payment in lieu of notice (PILON) comes in – allowing your employer to end your employment immediately while still honouring your notice period financially.

This guide explains what PILON is, how it works within a settlement agreement, how it’s taxed, and how it differs from garden leave. Whether you’re negotiating terms or reviewing an exit contract already on the table, we’ll help you understand your rights and avoid common pitfalls.

What is a PILON?

PILON, short for payment in lieu of notice, is a payment made to employees when their contract is terminated and they are asked to leave without working their full notice period.

Instead of requiring you to work, your employer pays you the salary you would have earned during your notice. PILON is a way to speed up the termination process without you losing out.

The benefits of PILON include:

• Immediate exit: You don’t have to work your notice period, which can reduce awkwardness or stress.
• Guaranteed pay: You still receive the full value of your notice period, even if you’re not working it.
• Certainty and clarity: Your employment ends cleanly, with a clearly defined end date and payment schedule

PILON in redundancy

Employers often prefer not to keep employees around once redundancy is confirmed, and may include a PILON redundancy payment in your exit package so your employment can end immediately.

This means you’ll receive:

• Your full notice pay (PILON)
• Any statutory or enhanced redundancy payment
• Other contractual entitlements due (e.g. holiday, bonus, etc.).

Other situations where PILON is used

PILON isn’t just for redundancy. Employers use these payments in a range of situations, including:

• Redundancy (voluntary and compulsory)
• Dismissal without gross misconduct, such as when the working relationship has broken down or there are ongoing performance concerns
• Mutually agreed terminations, often as part of a settlement agreement
• Long-term sickness or absence, where returning to work isn’t practical
• Resignation from a sensitive position, such as senior roles with access to clients, confidential information, or competitors.

Essentially, PILON is used when the employer wants the employee to leave quickly, but still needs to meet their contractual obligations.

When PILON may not be paid

If you’re dismissed for gross misconduct (such as theft, violence, or a serious breach of company policy), your employer is usually entitled to terminate your contract without notice. In these cases, they don’t have to offer PILON or pay you for your notice period.

PILON vs garden leave

PILON and garden leave are both ways to handle your notice period, but they’re very different in practice.

Employers may prefer PILON for a quicker break, while garden leave is often used for sensitive roles (e.g. to prevent access to competitors or clients).

Do you have to accept PILON?

If your employment contract includes a PILON clause, your employer has the right to make the payment and end your employment immediately – you won’t be able to refuse it.

However, if your contract doesn’t include a PILON clause, your employer can’t automatically pay you in lieu of notice without your agreement. If they end your employment without allowing you to work your notice, it could be a breach of contract, and you may be entitled to make an employment claim.

In these situations, it’s often best to negotiate sensible exit terms, such as PILON or garden leave, rather than challenge the dismissal through formal proceedings. It gives both sides a cleaner break, avoids potential conflict, and ensures you receive the pay and benefits you’re entitled to without unnecessary delay or legal risk.

How is PILON calculated?

Your PILON payment is based on what you would have earned during your notice period if you’d worked it. The starting point is your basic weekly salary, but it may include other regular payments you normally receive (unless your contract says otherwise). For example:

• Car allowance
• Shift allowance
• Commission (if contractually guaranteed)
• Guaranteed bonuses

The calculation is usually:
(Your weekly salary + eligible allowances) × number of weeks’ notice.

Is PILON taxable?

PILON is treated just like your regular salary, meaning it’s subject to income tax and National Insurance. This means:

• You can’t receive PILON tax-free
• You can’t avoid tax by having your employer label it as something else – HMRC looks at what the payment is for, not what it’s called
• You’ll see tax and National Insurance deducted before the payment is made to you

If PILON isn’t taxed correctly, or if your employer tries to mislabel it as compensation to avoid tax, HMRC may step in. And, even if the mistake was your employer’s, you could still be held personally responsible for paying the extra tax. This could lead to an unexpected tax bill or even interest or penalties if HMRC believes the misclassification was deliberate.

What if your contract doesn’t mention PILON?

If there’s no PILON clause in your employment contract, but you agree to a payment instead of working your notice, HMRC expects that payment to be taxed. This is where Post-Employment Notice Pay (PENP) comes in.

Under PENP rules, any payment that covers your notice period is treated like normal pay and taxed accordingly. So even if your employer calls it a lump sum or compensation, if it effectively covers notice pay, it will be taxed.

This differs from genuine compensation or redundancy payments, which may be tax-free up £30,000.

When should PILON be paid?

PILON is usually paid shortly after your employment ends, often within 7–14 days (although this may differ depending on the terms of your contract. If part of a settlement agreement, PILON should be itemised separately from any redundancy pay or compensation, so you can clearly see how much tax has been deducted.

Common mistakes to avoid when agreeing to PILON

Taking the time to understand how PILON works can save you from costly surprises. Here are some of the most common pitfalls employees run into when accepting a payment in lieu of notice, and how to avoid them:

• Assuming it’s tax-free: PILON is always taxable, regardless of how it’s worded in your exit agreement.
• Overlooking car or shift allowance: If your employment contract includes regular extras, these may need to be factored into your PILON calculation. Otherwise, you could end up being underpaid.
• Confusing redundancy pay with PILON: It’s easy to mix the two up, but PILON does not qualify for the £30,000 tax-free allowance – that only applies to genuine compensation or redundancy payments.
• Not reviewing the payment date: Make sure you know exactly when PILON will be paid. Payment delays could affect your ability to move on or plan financially.

PILON and settlement agreements

Settlement agreements are legally binding contracts used to bring employment to an end on agreed terms, often with a financial payment in exchange for waiving your right to bring future legal claims. These agreements are standard in redundancy situations, mutual exits, or workplace disputes.

PILON is commonly included in settlement agreements, especially when both parties want a clean break. In these cases, the PILON payment will be clearly stated as part of the total financial package.

When reviewing your settlement agreement, your solicitor should confirm that:

• The PILON amount is correct
• Tax and National Insurance are being deducted correctly
• The PILON is clearly separated from redundancy pay or ex gratia compensation
• There’s no overlap with garden leave.

Your settlement agreement should clearly break down the different elements of your payout, and legal advice will help you to confirm it’s calculated and taxed correctly.

PILON – FAQs

Let’s look at some of the most common questions we’ve been asked about payment in lieu of notice.

Same-day settlement agreement legal advice

Our specialist team, led by Gordon Turner, offer same-day settlement agreement advice for employees across the country, including London, Manchester & Birmingham. We’ll check your PILON, confirm your total payout is fair, and make sure you don’t get caught out by tax or contract errors.

With clear, expert guidance, we help you to:

• Understand your rights and what you’re agreeing to
• Make sure your compensation is fair and correctly taxed
• Move on from your role with confidence and peace of mind.

Need fast, expert advice on a settlement agreement? Contact GTE Settlement Agreement Solicitors today on 020 7247 7190. It’s free for employees, as your employer covers the cost.