How much of a termination payment is taxed as earnings because notice was not worked.
This is the calculation that decides whether the £30,000 exemption applies to your whole payment or only part of it. Getting it wrong in your favour usually means a tax bill later.
The short version
- The formula
- ((BP x D) / P) – T, from section 402D of ITEPA 2003.
- Basic means basic
- BP excludes bonuses, commission, overtime and benefits in kind.
- No exemption
- PENP is taxed as earnings. The £30,000 exemption applies only to what is left after it.
- National Insurance
- PENP attracts it. A genuine redundancy payment within the exemption does not.
- Contract, not practice
- D is the notice the contract required, not the notice actually given.
Common questions
What is PENP and why does it exist?
Post-employment notice pay is the slice of a termination payment that represents notice you did not work. Before April 2018, employers could label a payment in lieu of notice as compensation and shelter it under the £30,000 exemption. PENP closes that: the notice element is taxed as earnings whatever it is called.
Does the £30,000 exemption still apply?
Only to what is left after PENP. If your payment is £40,000 and PENP is £8,000, the £8,000 is taxed as earnings and the remaining £32,000 gets the exemption on its first £30,000. It does not work the other way round.
What counts as basic pay?
Basic salary only. Bonuses, commission, overtime, shift premiums and benefits in kind are all excluded, and so is anything sacrificed under a salary sacrifice arrangement — although the rules add sacrificed amounts back in for this calculation.
Which notice period do I use?
The notice your contract required, not what was actually given. If your contract says three months and you were paid one month in lieu, the unworked period is measured against the three months.
Is PENP subject to National Insurance?
Yes, both employee and employer. That is a further difference from a genuine redundancy payment within the exemption, which attracts neither.
What if the answer is nil or negative?
A negative result is treated as nil. That usually means the notice was fully worked, or the payment in lieu was already taxed as earnings, in which case the whole termination payment can use the exemption.
What the terms mean
- PENP
- Post-employment notice pay: the part of a termination payment representing notice that was not worked, taxed as earnings rather than compensation.
- BP
- Basic pay in the last pay period ending before the trigger date. Excludes bonus, commission, overtime and benefits.
- D
- The number of days in the unworked period of notice, taken from what the contract required.
- P
- The number of days in the last pay period. Thirty for a calendar month, seven for a week.
- T
- Amounts already taxed as earnings on termination, such as a contractual payment in lieu of notice. Subtracted to avoid taxing the same money twice.
- Trigger date
- Usually the last day of employment. It fixes which pay period counts as the last one for BP.
- Section 402D
- The provision in ITEPA 2003 setting out the PENP formula, introduced in April 2018 to stop PILON being dressed up as compensation.
Guides on this subject
-
Pay in lieu of notice (PILON): what it is and how it is taxed
PILON means being paid for notice instead of working it. Since April 2018 it is taxed in full as earnings,…
-
Is redundancy pay taxable? The £30,000 exemption explained
Statutory redundancy pay is tax free. Enhanced payments are treated differently and notice pay is not covered at all. What…
-
Statutory notice periods: how much notice you must give and receive
Your employer owes one week per year of service, capped at 12. You owe one week however long you have…
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