PILON vs Working Your Notice: What's the Difference?

Notice is an entitlement, not a courtesy

When your employment ends, you are entitled to a notice period — either worked or paid. This is a legal right under the Employment Rights Act 1996, and it applies regardless of whether your employer would prefer a clean break.

The statutory minimum is one week of notice per complete year of service, up to a maximum of 12 weeks. If your contract provides for a longer notice period, the contractual figure applies. Your employer cannot unilaterally reduce your notice entitlement by choosing not to honour the contract.

Working your notice

If you work your notice, you remain an employee until the last day of the notice period. You continue to receive your normal salary, pension contributions, and benefits throughout. Any holiday that accrues during the notice period must also be paid or taken.

Working notice is straightforward from a tax perspective — it is treated as normal employment income, subject to PAYE income tax and National Insurance.

Some employers ask employees who have been made redundant to not come into the office during their notice period — sometimes called "garden leave." If this happens, you are still technically working your notice. All pay and benefits continue as normal.

Pay in lieu of notice (PILON)

PILON occurs when your employer ends your contract immediately and pays you a lump sum equal to what you would have earned during your notice period, rather than having you work it.

The tax treatment of PILON changed significantly in April 2018. Under current rules:

PILON is always taxable as employment income — regardless of whether your contract contains a PILON clause. Before 2018, PILON without a contractual clause could sometimes be paid free of income tax and National Insurance. That is no longer the case.

This means the amount of PILON you actually receive in your bank account will be reduced by income tax at your marginal rate and employee National Insurance.

How PILON affects your redundancy pay entitlement

PILON and statutory redundancy pay are separate entitlements. Receiving PILON does not reduce your redundancy pay, and receiving redundancy pay does not offset any notice obligation.

Some employers confuse (or conflate) these — particularly when making someone redundant on the same day they are told. If you are dismissed without notice and given a payment described as "a mixture of redundancy pay and notice pay," make sure both elements are correctly identified and calculated.

The £30,000 exemption and notice pay

This is one of the most commonly misunderstood areas of redundancy taxation.

The £30,000 tax-free exemption applies to genuine redundancy payments and certain other termination payments. It does not apply to PILON. Notice pay is always taxable as employment income and sits entirely outside the £30,000 exemption.

So if your total package is:

• Statutory redundancy pay: £8,000 (tax-free, within the £30,000 limit)
• PILON: £5,000 (taxed as normal income)

The PILON is taxable regardless of how much headroom exists under the £30,000 exemption. The two pots do not mix.

See our guide on what counts towards your redundancy pay calculation for more on how the weekly pay figure is defined.

What if your employer gave you no notice and no PILON?

If you received neither worked notice nor PILON, you have a claim for wrongful dismissal — the amount owed being your notice pay less any mitigation (income earned during the notice period from another job).

Wrongful dismissal is a breach of contract claim. You can bring it through an Employment Tribunal (subject to the 3-month time limit from termination) or through the civil courts (where a 6-year limitation period applies).

This amount is separate from and in addition to your statutory redundancy pay claim.

Garden leave vs PILON — a quick comparison

| | Garden leave | PILON | |--|--|--| | Employment status | Still employed | Employment ends immediately | | Tax treatment | Normal PAYE | Normal PAYE | | Benefits continue? | Yes | No (unless agreed) | | Holiday accrues? | Yes | No | | Can you start new job? | Generally no without consent | Yes |

If you are weighing up whether to accept PILON or negotiate to work your notice (or vice versa), the impact on benefits, holiday accrual, and your ability to start a new role quickly are the key practical considerations alongside tax.

See our guide on whether you can negotiate your redundancy package for the wider picture on what is negotiable when leaving employment.