Redundancy
PILON vs redundancy pay — what's the difference?
7 min read · Reviewed by BenefitCheck Editorial Team · Updated 18 June 2026
A typical redundancy settlement bundles together two very different kinds of money. PILON is wages — taxed, treated as income, and gone in the month it lands. Redundancy pay is compensation — tax-free up to £30,000, treated as capital, and kept until you spend it. Confusing the two is the most common reason people miscalculate what they'll actually receive — and what Universal Credit will pay.
Side by side
- What it is: PILON = wages for your unworked notice period. Redundancy = compensation for losing the job.
- Tax: PILON fully taxed (PAYE + NI). Redundancy tax-free up to £30,000.
- Universal Credit: PILON = earnings (this month). Redundancy = capital (lasts).
- Pension auto-enrolment: PILON is pensionable in some schemes. Redundancy never is.
- Statutory minimum: PILON depends on contract / notice period. Redundancy follows statutory formula by age and service.
What PILON actually is
Your contract usually gives you notice — say, four weeks or three months. If the employer wants you to leave straight away rather than work the notice, they pay you what you would have earned during that period as a lump sum. That's PILON. Because the underlying nature is wages, HMRC treats it as earnings and taxes it in full.
What statutory redundancy pay actually is
Statutory redundancy pay is compensation for losing the job. The amount depends on your age and length of service:
- Half a week's pay for each full year of service under age 22
- One week's pay for each full year between 22 and 41
- One and a half weeks' pay for each full year age 41 and over
- Capped at 20 years of service and a weekly cap (around £719 for 2026/27)
Many employers offer enhanced redundancy — more generous than the statutory minimum. The tax-free £30,000 covers statutory and enhanced redundancy together.
How Universal Credit treats each
DWP cares deeply about the distinction. PILON shows up on the HMRC earnings feed and is counted as wages for that month — it usually wipes out the first UC payment. Redundancy pay is capital — it adds to your savings total and affects UC only through the £6,000/£16,000 thresholds and tariff income.
Real-world examples
Illustrative situations to help you recognise patterns close to yours.
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What catches people out
- An employer may try to label PILON as 'compensation' to avoid PAYE. HMRC reverses this with the PENP rules and you may end up with a tax bill.
- Notice pay and PILON together cannot exceed your contractual notice — anything beyond is genuine redundancy.
What usually happens next
- Get a payslip that lists PILON, redundancy and holiday pay on separate lines.
- Calculate your statutory entitlement using GOV.UK's redundancy calculator.
- Plan your UC claim date around when the PILON will land — not just when you leave.
- Keep the settlement letter and final payslip together for any future queries.
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 →
- Is PILON taxed? A plain-English guide for UK workersYes — PILON is fully taxed in the UK. This guide explains why, how Post-Employment Notice Pay (PENP) works, what appears on your payslip, and how the tax interacts with redundancy pay and Universal Credit. 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 →
- Universal Credit after redundancy: who can claim and how muchA calm, plain English guide to claiming Universal Credit after redundancy — how redundancy pay, savings, notice pay, a working partner and housing costs change what you receive. 2026/27 rules.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
Is PILON taxed? A plain-English guide for UK workers
Yes — PILON is fully taxed in the UK. This guide explains why, how Post-Employment Notice Pay (PENP) works, what appears on your payslip, and how the tax interacts with redundancy pay and Universal Credit. Updated for 2026/27.
Redundancy
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.
Redundancy
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.
Universal Credit
Universal Credit after redundancy: who can claim and how much
A calm, plain English guide to claiming Universal Credit after redundancy — how redundancy pay, savings, notice pay, a working partner and housing costs change what you receive. 2026/27 rules.