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Redundancy

PILON and Universal Credit — how pay in lieu of notice affects your claim

9 min read · Reviewed by BenefitCheck Editorial Team · Updated 18 June 2026

PILON is the part of a redundancy package most likely to surprise someone making a first UC claim. People assume the whole settlement is treated the same way, and find that one component — the pay in lieu of notice — wipes out their first month's award. The mechanics aren't complicated once you see them written down, but the timing decisions can save (or cost) hundreds of pounds.

The short answer

PILON is treated as earnings, not capital. It is fully taxed and counted as income in the Universal Credit assessment period it is paid in. Statutory redundancy pay, by contrast, is capital — tax-free up to £30,000 and counted toward the £6,000/£16,000 savings thresholds.

A PILON of one or two months' salary, landing inside your first UC assessment period, will usually reduce that month's UC payment to zero. The following month is unaffected.

Why DWP treats PILON as earnings

Pay In Lieu of Notice is, in HMRC's eyes, the wages you would have earned during your notice period — paid as a lump sum because your employer wants you to leave straight away. Because it is wages, it is taxed under PAYE and National Insurance, and reported to HMRC in real time. UC pulls earnings data from HMRC's Real Time Information feed, so PILON appears on your claim automatically.

Genuine redundancy pay is different — it compensates you for the loss of the job itself, not for work you would have done. That is why it gets the £30,000 tax-free treatment and is treated as capital.

Timing inside the assessment period

Your UC assessment period starts on the day you claim. Anything paid into your bank inside that month counts for that month. PILON paid on the last day of one assessment period is treated very differently from PILON paid on the first day of the next.

  • If PILON arrives before you claim UC, it doesn't count as earnings — but the cash left over becomes capital.
  • If PILON arrives inside the first assessment period, it counts as earnings that month.
  • Once spent in the same period, it does not roll forward as capital.

How PILON is taxed

Since 2018, all PILON is treated as 'Post-Employment Notice Pay' (PENP) and subject to income tax and Class 1 National Insurance. There is no longer a £30,000 tax-free band for PILON itself — only for the genuine redundancy element of a settlement.

Real-world examples

Illustrative situations to help you recognise patterns close to yours.

If one of these situations sounds close to yours, an indicative benefit check usually takes about five minutes.

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What usually happens next

  • Find out your exact assessment period dates — they are fixed on the day you claim.
  • Check whether your PILON will land before or after you claim. A delay of even a few days can matter.
  • If PILON has already landed and you've claimed, accept the first month may be zero and plan around it.
  • Keep the payslip showing the PILON breakdown — you may need it if DWP queries the figures.

What catches people out

  • Some employers label the whole settlement 'redundancy' on the payslip — check whether part of it is actually PILON.
  • Holiday pay on leaving is also treated as earnings, separately from PILON.
  • Spending PILON quickly to 'get under' a threshold can trigger deprivation of capital.

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.

People often ask

When advice may help

  • Your settlement mixes PILON, ex-gratia and redundancy with no clear breakdown.
  • You are considering negotiating the leave date to manage UC timing.
  • You are close to the £16,000 capital threshold.

Find out what you may be entitled to

Take the free 15-question check for an indicative view of UK benefits and support that may apply to you. No login, no email required.

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Frequently asked questions

Sources and further reading

Practical next steps

Calm, ordered actions you can take now. Pick the one that fits where you are today.

  1. Start the free benefit check

    Indicative results in about five minutes. No login.

  2. Model your situation in the scenario tool

    Adjust savings, partner income or rent to see how the estimate shifts.

Documents you may want to gather

  • Settlement agreement or redundancy letter
  • Final payslip showing PILON, redundancy and holiday pay separately
  • Bank statements showing when each payment landed

Mixed-age couples, self-employment, immigration status and overpayments often need tailored advice. Citizens Advice is free.

Common situations

People reading this guide often find one of these situations close to theirs.

Explore the redundancy support hub

Step-by-step guidance, tools and deeper articles for the weeks after redundancy.

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