Pay in lieu of notice: what it is, and what you are owed

When a job ends, the notice period is often the last thing on your mind until your employer decides to skip it. Instead of having you work your notice, they end your employment immediately and pay you for the time you would have worked. That payment is called pay in lieu of notice, usually shortened to PILON.

Used properly it is entirely lawful and can suit both sides: you get the money without working the weeks, and your employer gets a clean, immediate break. The problems start when the payment is wrong, missing, or quietly bundled into a settlement without being explained.

What notice are you actually entitled to?

Your notice comes from two places, and you are entitled to whichever is longer:

• Statutory notice. Once you have worked for your employer for one month, the legal minimum is one week's notice. After two full years of service it rises to two weeks, and it keeps increasing by one week for each additional year, up to a maximum of 12 weeks after 12 years.
• Contractual notice. Most contracts set out a longer period, commonly one month for junior roles and three to six months for senior ones. If your contract gives you more than the statutory minimum, the contract wins.

Your employer must give the same notice in return for any dismissal other than for gross misconduct, where summary dismissal with no notice can be lawful if a fair process was followed.

Can your employer always use PILON?

That depends on your contract. If there is a PILON clause, your employer can end your employment immediately and pay the notice money, and doing so is not a breach of contract. If there is no PILON clause, dismissing you without notice is technically a breach of contract, and the payment becomes damages for that breach. In practice the money should be the same either way; the difference matters mainly where benefits are involved.

This is the point people miss. A proper contractual PILON usually only has to cover your basic salary unless the clause says otherwise. Where there is no clause and the payment is damages for breach, you can usually claim the full value of what you would have received during notice: pension contributions, car allowance, health cover, bonus or commission you would have earned, and holiday you would have accrued. If your employer has paid bare salary for a long notice period with no PILON clause, the shortfall can be significant.

How is PILON taxed?

Since April 2018 the rules are simple and strict: all pay in lieu of notice is taxed as earnings. Income tax and National Insurance come off in the normal way, whether or not your contract has a PILON clause, and whether the payment is called PILON, damages or something else.

HMRC makes employers work out the post-employment notice pay figure (known as PENP) to check this. The practical consequence is that notice pay cannot be folded into the £30,000 tax-free element of a settlement agreement. If your settlement paperwork shows your notice pay inside the tax-free sum, that is a red flag worth raising before you sign.

PILON, garden leave and working your notice: what is the difference?

• Working notice: you carry on as normal until the end date.
• Garden leave: you stay employed and paid, but stay away from work, usually to keep you out of the market while you are still bound by your contract. Our garden leave guide covers your rights during that period.
• PILON: employment ends immediately and the notice money is paid in one go.

The distinction matters because restrictive covenants and benefits usually only bite while you are still employed. A move to PILON can shorten the time you are tied down, but it also ends benefits on the termination date.

PILON in redundancy and settlement agreements

PILON frequently appears alongside redundancy, where statutory notice still applies on top of any redundancy payment. If you are being made redundant, our guide to redundancy pay explains how the two payments sit together. In a negotiated exit, notice pay is one of the standard heads of the deal; our settlement agreement calculator guide walks through how a package is valued overall.

What to do if the payment looks wrong

1. Check your contract for the notice clause and any PILON clause.

2. Compare the payment against your full package for the notice period, not just salary.

3. Raise it in writing with your employer first; most shortfalls are settled quickly once queried.

4. If you are under pressure to sign a settlement agreement, do not sign until the notice element has been checked. The agreement is only binding once you have taken independent legal advice, and your employer normally contributes to that fee.

A specialist employment solicitor can tell you in one call whether the figure on the table is right. Match My Solicitor connects you with employment solicitors who deal with notice, exit and settlement disputes every day, with a free initial enquiry.