Pay in lieu of notice (PILON): how it works and how it's taxed
Payment in lieu of notice, or PILON, is when your employer ends your job straight away and pays you for the notice period instead of asking you to work it.
How much notice are you entitled to?
By law you get at least one week's notice after one month's service, then one week for each full year of service, up to 12 weeks. Your contract can give you longer. Whichever is longer applies, and your PILON should cover that full period.
Can my employer pay me in lieu of notice?
If your contract includes a PILON clause, your employer can end your employment immediately and pay you instead. If there's no clause, they can still do it, but it's technically a breach of contract and the payment is treated as damages. In practice most employees receive the same amount either way.
What should PILON include?
At minimum, PILON should cover the basic pay you'd have earned during your notice period. Depending on your contract, it may also cover benefits, pension contributions and bonuses. It's separate from payment for any holiday you've built up but not taken, which you're owed on top.
Is PILON taxable?
Yes. Since April 2018 all payments in lieu of notice are taxed as earnings, whether or not your contract has a PILON clause. Income tax and National Insurance are deducted in full, and PILON can't use the £30,000 tax-free allowance for redundancy and termination payments.
Garden leave vs PILON
On garden leave you stay employed and paid through your notice period, but don't work. You can't start a new job until it ends. With PILON your employment ends straight away, so you're free to start elsewhere.