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Calculating Redundancy Payment In Lieu Of Notice (PILON)
Redundancy can be a challenging and unsettling experience for both employers and employees. When an employer decides to terminate an employee’s contract due to redundancy, certain obligations must be met, including providing a notice period or making a payment in lieu of notice (PILON). PILON allows the employer to terminate the contract without requiring the employee to work the notice period. This blog aims to provide a clear understanding of how to calculate a Payment in Lieu of Notice following redundancy.
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Establish the notice period
The first step in calculating PILON is to determine the notice period owed to the redundant employee. The notice period depends on the length of continuous service the employee has with the company. The notice period will be the following statutory notice, unless the contract of employment details a greater notice period:
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- Less than one month of service: No statutory notice period.
- One month to two years of service: One week’s notice.
- Two to 12 years of service: One week’s notice for each year of service (e.g., six years of service would result in six weeks’ notice).
- More than 12 years of service: Twelve weeks’ notice.
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Calculating payment in lieu of notice
An employee’s length of service for redundancy purposes should be calculated as at the “relevant date” in accordance with s.145 of the Employment Rights Act 1996. Where an employee has been dismissed without the statutory minimum notice to which he or she is entitled, including where payment is made in lieu of notice, s.145(5) states that the relevant date is the date on which the minimum notice would have expired had it been given.
Statutory notice period
So, if an employee had reached an anniversary increasing his or her length of service during the statutory minimum notice period, had he or she not been dismissed without notice, the extra year should be included in the calculation of his or her redundancy payment.
For example, an employee with five years and 11 months’ service is entitled to five weeks’ statutory minimum notice (under s.86 of the Employment Rights Act 1996). If the employee is dismissed with a payment in lieu of notice, the redundancy payment will be calculated based on six years of service because the five weeks’ notice required under s.86 would have taken him or her past the anniversary date.
The maximum statutory notice period is 12 weeks, so a long-serving employee with 20 years and 10 months’ service, for example, is entitled to 12 weeks’ statutory minimum notice (under s.86 of the Employment Rights Act 1996). If this employee is dismissed with a payment in lieu of notice, the redundancy payment will be calculated based on 21 years’ service because the 12 weeks’ statutory notice period would give them an additional full year’s service.
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Pay rate for statutory notice pay
While there is a statutory cap on a week’s pay for the purposes of calculating statutory redundancy pay, no such cap exists for notice pay, so any payment made in lieu of notice should be paid at the employee’s normal basic pay.
The PILON amount should be equal to the employee’s basic salary (and any other specifically referenced elements from the contract of employment) for the notice period they would have been entitled to if they had worked it. The calculation would be as follows:
Pilon Payment Calculation
PILON Payment = (Basic Salary / 52.14) * Number of Notice Weeks
Employers may of course choose to pay above the statutory rates if this is more appropriate to the company culture. However, the principle of calculating length of service for a payment in lieu of notice remains the same.
Pay in Lieu of Notice (PILON) Calculator
Estimate gross PILON and holiday pay based on salary, notice owed, and benefits.
This tool is for guidance only — not legal advice.
Tax implications
PILON payments are subject to income tax and National Insurance contributions (NICs) in the UK. Since April 2018, all PILON payments, whether contractual or not, have been taxable. Employers must ensure that they calculate and deduct the correct amount of tax and NICs before making the payment to the redundant employee.
Calculating PILON following redundancy requires accuracy and compliance with UK employment laws and tax regulations. Redundancy can be a challenging time for all parties involved, but understanding the PILON calculation process can help streamline the transition, ensure fair treatment for both employers and employees and prevent claims against the employer.
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Frequently Asked Questions
What is Payment in Lieu of Notice (PILON) and when is it used?
Payment in Lieu of Notice (PILON) is when an employer chooses to end a contract immediately rather than asking the employee to work through their notice period. Instead of working, the employee receives a payment equivalent to what they would have earned during that time. This approach is often used during redundancy to allow both parties to move on quickly, while still meeting legal obligations.
How do I calculate the correct PILON amount?
The calculation is based on the employee’s normal weekly basic pay, multiplied by the number of weeks’ notice they are entitled to. For example:
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Employee’s weekly salary ÷ 52.14 (to get weekly pay from annual)
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Multiply by the number of statutory (or contractual) notice weeks owed
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It’s important to note that PILON should reflect the full salary owed for the notice period, not a capped amount. Some contracts may also require you to include elements like allowances or commission, so always check the wording of the employment contract.
How does PILON affect redundancy pay?
Redundancy pay and PILON are separate. However, PILON can impact the calculation of redundancy entitlement in one important way: if the statutory notice period would take the employee past an anniversary of service, the extra year must be counted when working out redundancy pay. For example, if an employee is five weeks short of a work anniversary but entitled to six weeks’ notice, redundancy pay should be based on six full years of service.
Is PILON taxable?
Yes. Since April 2018, all PILON payments are subject to tax and National Insurance contributions, regardless of whether they are written into the contract. Employers must deduct these before making the payment, and employees should be aware that the net amount they receive will be less than the gross calculation.
What’s the difference between statutory notice and contractual notice?
The law sets out minimum notice periods based on length of service, but some contracts offer more generous terms. If a contract states a longer notice period, the employer must honour this when calculating PILON. For example, if an employee’s contract gives three months’ notice (instead of the statutory six weeks), the PILON payment must be based on three months’ salary.
This article is intended for general information purposes only and does not constitute legal or professional advice. It should not be relied upon as a substitute for advice tailored to your individual circumstances. Please be aware that the law may have changed since the article was published.
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