Q&As

In a settlement agreement, if an employee elects to divert a £20,000 payment in lieu of notice payment into a pension scheme, how does this affect the PENP calculation?

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Published by a ³ÉÈËÓ°Òô Tax expert
Published on: 16 March 2021
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Post-employment notice pay (PENP) calculation

The first step when considering the taxation of termination payments, including payments in lieu of notice (PILON), is to ascertain the ‘post-employment notice pay’ (PENP). The PENP calculation in essence provides a theoretical threshold against which the actual termination award should be measured in order to establish any tax liability. An employer is therefore required to carry out a PENP calculation whenever it makes a ‘relevant termination award’, being a termination award that is not a Redundancy payment (or an ‘approved contractual payment’ to the extent exempt under section 309 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)—such approved contractual payments are quite rare in practice). Having carried out the calculation:

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    if the PENP is less than the entire termination award, only the amount of the termination award equal to the PENP is treated as earnings, with the balance subject to

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Jurisdiction(s):
United Kingdom
Related legal acts:
Key definition:
Payment In Lieu Of Notice definition
What does Payment In Lieu Of Notice mean?

Payment In Lieu Of notice (‘PILON’) clauses give the employer the express right to make a payment instead of giving notice, allowing the employee’s immediate termination and removal from the workplace. In the absence of a contractual PILON, employees may remain in employment for the notice period and be paid for it, and attempted summary dismissal will be ineffective unless the employee accepts that repudiation.

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