Redundancy
Is PILON taxed? A plain-English guide for UK workers
7 min read · Reviewed by BenefitCheck Editorial Team · Updated 18 June 2026
Most people receiving a redundancy package for the first time assume the whole sum is tax-free up to £30,000. It isn't. Since April 2018, the Pay In Lieu of Notice part of any settlement is taxed in full under PAYE — including National Insurance. The £30,000 exemption applies only to the genuine redundancy element. Here is what that means in practice.
The short answer
Yes. PILON is taxed as ordinary earnings under PAYE — income tax at your marginal rate and Class 1 National Insurance. It also counts toward your annual taxable income, which can push you into a higher band if the lump sum is large.
Why PILON is taxed in full
HMRC treats PILON as 'Post-Employment Notice Pay' (PENP). The reasoning: PILON is the wages you would have earned during your notice period, simply paid as a lump sum. Because the underlying nature is wages, it is taxed like wages. Before April 2018, contractual and non-contractual PILON were taxed differently — that loophole has been closed.
How much tax you'll actually pay
- Income tax at 20%, 40% or 45% depending on the band you fall into when the lump sum is added to other earnings in the tax year.
- Class 1 National Insurance — 8% on earnings in band, 2% above the upper earnings limit.
- Employer also pays Class 1A NI on the PILON, but that doesn't reduce your take-home.
Reading your final payslip
A well-prepared final payslip will show three separate lines:
- PILON or 'Notice Pay' — fully taxed
- Redundancy Pay — tax-free up to £30,000
- Holiday Pay — fully taxed
If your payslip just shows one lump sum labelled 'Redundancy', ask payroll for a breakdown. You will need it for HMRC, and for any Universal Credit claim, because UC treats the PILON portion as earnings.
How the tax interacts with Universal Credit
UC works off net earnings reported through HMRC's Real Time Information system. Because PILON is taxed under PAYE, the net figure that hits your account is what UC will see and count as earnings in the assessment period it lands in. The taxed portion never reaches you, but the gross figure may push you into a higher band for that year — worth knowing if you take new work later.
Real-world examples
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What catches people out
- Settlement agreements occasionally mislabel PILON as compensation to try to bring it under the £30,000 tax-free band. HMRC reverses this with the PENP formula.
- If PILON pushes you into a higher tax band, you may need to file a Self Assessment return that year.
What usually happens next
- Ask your employer for a written breakdown of PILON, redundancy and holiday pay before signing a settlement agreement.
- Use HMRC's tax checker to estimate your tax position for the year.
- If claiming Universal Credit, note the assessment period the PILON will land in.
- Keep the final payslip and P45 — both will be needed for tax queries and benefit checks.
What usually comes next
People in this situation often explore
These are the questions readers usually look at next — pick whichever feels closest to where you are.
- PILON and Universal Credit — how pay in lieu of notice affects your claimA careful UK guide to how Pay In Lieu of Notice interacts with a Universal Credit claim. Covers timing inside the assessment period, why PILON is treated as earnings, realistic worked examples, and what usually happens next. Updated for 2026/27.Read guide →
- PILON vs redundancy pay — what's the difference?A plain-English comparison of Pay In Lieu of Notice and statutory redundancy pay in the UK — what each one is, how they're taxed differently, how Universal Credit treats them, and how to read a redundancy settlement. Updated for 2026/27.Read guide →
- How redundancy pay affects Universal Credit (PILON, savings, timing)How statutory and enhanced redundancy pay, PILON, holiday pay and final salary are treated by Universal Credit — capital vs earnings, assessment-period timing and worked examples. 2026/27 rules.Read guide →
- Does redundancy money count as savings?How Universal Credit treats redundancy pay once it arrives — when it counts as savings, when it counts as earnings, and how monthly assessment periods change the picture. Plain English, with worked examples. Updated for 2026/27.Read guide →
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Related guides
Redundancy
PILON and Universal Credit — how pay in lieu of notice affects your claim
A careful UK guide to how Pay In Lieu of Notice interacts with a Universal Credit claim. Covers timing inside the assessment period, why PILON is treated as earnings, realistic worked examples, and what usually happens next. Updated for 2026/27.
Redundancy
PILON vs redundancy pay — what's the difference?
A plain-English comparison of Pay In Lieu of Notice and statutory redundancy pay in the UK — what each one is, how they're taxed differently, how Universal Credit treats them, and how to read a redundancy settlement. Updated for 2026/27.
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How Universal Credit treats redundancy pay once it arrives — when it counts as savings, when it counts as earnings, and how monthly assessment periods change the picture. Plain English, with worked examples. Updated for 2026/27.