This guide is maintained as a current resource for July 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Does your redundancy package include PILON? Learn how these payments are calculated, how they are taxed, and how they interact with your overall statutory redundancy pay.
When an employee is made redundant in England and Wales, the employer must normally give a notice period before the employment ends. Instead of requiring the employee to work through that notice, the employer may choose to make a payment in lieu of notice (PILON). This article explains how pay in lieu of notice works in redundancy situations, when it applies, how it affects redundancy pay and other entitlements, how it is taxed, and what practical steps employees and employers should consider. The content draws on up‑to‑date, authoritative UK government and advisory sources.
What Is Pay in Lieu of Notice?
Pay in lieu of notice (often referred to by the acronym PILON) is a lump‑sum payment made by an employer to an employee instead of requiring them to work through their notice period. Under redundancy law, employees are generally entitled to a notice period based on length of service, unless their contract provides otherwise. Instead of working that period, the employer can offer payment to cover the pay the employee would have received during notice.
How Notice Normally Works
When an employee is selected for redundancy and the consultation process has concluded, the employer must give written notice of termination. Statutory minimum notice depends on length of service:
- At least one week's notice for one month to two years' service.
- One week's notice per full year for two to 12 years' service.
- 12 weeks' notice for 12 or more years' service.
An employment contract may provide longer contractual notice, in which case the contractual period applies if it is more favourable to the employee.
When Pay in Lieu of Notice Applies
There are two main scenarios where PILON may arise:
1. Contractual PILON Clause
Many employment contracts contain a clause allowing the employer to end the contract immediately by paying PILON. If such a clause exists, the employer can terminate the employment on the redundancy notice date and pay the employee for the full notice the contract requires.
2. Agreed PILON Without a Clause
Even if the contract does not include a PILON clause, the employer and employee can agree that the employee will not work their notice and instead receive a payment. This is often part of redundancy settlement negotiations. The agreement should preferably be in writing to avoid disputes.
What Pay in Lieu of Notice Includes
Pay in lieu of notice should reflect the basic pay the employee would have received during their notice period. This normally includes:
- Basic salary at the current rate.
- Average weekly earnings for variable pay situations, based on the usual 12‑week reference period.
Depending on the contract, PILON may also include other contractual benefits such as pension contributions or private health care if these would have been payable during the notice period.
However, not all benefits automatically transfer - inclusion of non‑salary elements depends on the terms of the employment contract or specific agreement.
How PILON Affects Redundancy Pay
A payment in lieu of notice does not replace statutory redundancy pay; it is separate and additive to any redundancy compensation an employee is entitled to if they have at least two years' continuous service.
When calculating statutory redundancy pay, the relevant date for length of service may be determined by the notice period that would have applied if the employee had worked the notice in full. If the employer pays PILON instead, the statutory calculation may include the period that would have been covered by notice for the purpose of assessing continuous service. This can affect the number of years of service counted for redundancy entitlement.
Example:
An employee with 8 years and 11 months' service is entitled to 8 weeks' statutory notice. If the employer pays PILON, the calculation for redundancy pay must treat the service as if the employee had worked through those notice weeks, giving a notional 9 years and 1 month's service for redundancy purposes.
Tax and National Insurance Treatment
Under current UK tax rules, PILON is treated as earnings and is subject to Income Tax and National Insurance contributions in the same way as normal pay. This applies whether the PILON is contractual or agreed by the parties.
In contrast, statutory redundancy pay and qualifying enhanced redundancy payments are tax‑free up to £30,000 as part of termination payments, provided they meet the statutory criteria. When calculating tax on a termination package, employers and HMRC often distinguish between:
- PILON (taxable earnings).
- Statutory redundancy pay (tax‑free up to £30,000).
- Contractual or enhanced redundancy payments (potentially tax‑free up to the £30,000 threshold, depending on terms).
Understanding the tax status of each element can affect the net income an employee receives and is an important consideration in redundancy negotiations.
Notice Pay and Other Termination Payments
In redundancy cases, an employee's final pay packet may include:
- Salary for work done up to the termination date.
- Pay in lieu of notice (PILON).
- Statutory redundancy pay (if eligible).
- Accrued but unused holiday pay.
These elements must be itemised and paid either on the last day of employment or on the final payroll date unless the employer and employee agree otherwise in writing.
Employers should communicate clearly how each component has been calculated to avoid disputes, and employees should request a written breakdown if one is not provided.
Legal and Practical Considerations
Contract Review
Employees should review their employment contract to determine:
- Whether a PILON clause exists.
- How notice and benefits are defined.
- Whether contractual notice exceeds the statutory minimum.
If a contract contains a PILON clause, the employer can unilaterally end the employment with payment instead of notice. If not, employees may choose to accept or refuse a PILON offer.
Accepting a PILON Offer
Where a PILON is offered without a contractual provision, acceptance should ideally be documented to avoid future disputes. In some cases, a negotiated settlement agreement may encompass PILON and other termination payments, often in return for agreeing not to pursue tribunal claims.
Disputes and Tribunal Claims
If an employee believes they were not given the correct PILON or statutory notice entitlements, they may raise a concern with the employer. Failing resolution, they can consider a claim to an employment tribunal, typically within three months minus one day from the date of termination for contractual disputes, or six months minus one day for statutory redundancy pay claims.
Tribunals will examine employment status, notice entitlements, and whether PILON and redundancy payments have been calculated correctly under the terms of the contract and statutory provisions.
Common Questions
Is PILON always paid?
No. PILON is only mandatory where the contract includes a PILON clause or where the employer and employee agree to it. Otherwise, the employee may be required to work their notice.
Does PILON count as redundancy pay?
No. PILON is separate from statutory redundancy pay and is compensation for not working notice. Both can be paid in a redundancy situation if applicable.
Can PILON affect redundancy service length?
Yes. For statutory redundancy calculations, the period that would have been covered by actual notice can be included if PILON is paid.
Is PILON taxable?
Yes. PILON is taxable and subject to National Insurance in the same way as normal earnings.
Key Takeaways
Pay in lieu of notice (PILON) is a lump‑sum payment made to an employee instead of requiring them to work through their notice period when made redundant. It can arise under a contractual clause or by agreement between employer and employee. PILON is separate from statutory redundancy pay and general pay entitlements, and it is treated as taxable earnings. Understanding contractual terms, notice rights, and how PILON affects redundancy pay calculations is essential for both employees and employers. Clear communication and written documentation of notice terms and payments help minimise disputes, and employment tribunal remedies remain available where entitlements are not met.
