Redundancy Pay In Lieu Of Notice (PILON) In The UK: Employer Guide

If you’re running a small business, redundancies can be one of the toughest parts of the job. Even when the commercial reasons are clear, the admin and legal obligations can feel like a minefield.

One of the most common “what do we actually pay?” questions we hear is about paying notice as pay in lieu of notice (often shortened to PILON) in a redundancy situation.

In plain English: if you don’t want (or can’t have) an employee work their notice period, you may end their employment immediately and pay them what they would have earned during notice instead.

But the details matter. PILON can affect:

• your legal risk (including unfair dismissal arguments),
• how you calculate the final payslip,
• how tax and National Insurance are treated, and
• whether you’ve actually followed your contract correctly.

Below we’ll break down how redundancy pay in lieu of notice works in the UK, what you should include, and how to avoid common mistakes.

What Is Redundancy Pay In Lieu Of Notice (PILON)?

Pay in lieu of notice (PILON) is a payment you make when you terminate someone’s employment without requiring them to work their notice period.

It’s important to separate three concepts that are often mixed up:

• Notice pay: pay the employee receives during their notice period (whether they work it or not).
• PILON: notice pay paid as a lump sum (or in another agreed form) because employment ends immediately.
• Redundancy pay: a separate payment (statutory and/or enhanced) due because the role is genuinely redundant.

So when people talk about redundancy pay in lieu of notice, they usually mean:

• the employee is being made redundant, and
• you’re paying their notice entitlement as PILON rather than having them work it.

Done properly, PILON can be a practical tool. For example, you might want a clean break for operational reasons, to protect customer relationships, to manage morale, or because there simply isn’t enough meaningful work during the notice period.

But PILON needs to be handled carefully - ideally it’s supported by a clear clause in your Employment Contract, and it must be calculated correctly.

When Can You Use PILON In A Redundancy Situation?

In a redundancy context, you can typically use PILON where:

• you’ve carried out a fair redundancy process (including consultation), and
• you give the employee notice or pay in lieu of that notice.

From a risk-management point of view, the key is not treating PILON as a “shortcut” around process. Paying PILON doesn’t automatically make a redundancy fair - it simply deals with the notice period.

Contractual PILON Vs Non-Contractual PILON

There are two broad categories:

• Contractual PILON: your contract includes a right to terminate with immediate effect by paying in lieu of notice.
• Non-contractual PILON: your contract doesn’t include a PILON clause, but you still want to end employment immediately and pay what would have been earned during notice.

Why does this distinction matter? Because if there’s no PILON clause and you terminate immediately, you may technically be breaching the employment contract (even if you pay them). In many cases the payment will be treated as damages for breach, and this can create unnecessary dispute risk.

This is one reason many employers bake a well-drafted PILON clause into their contracts and policies from day one (often alongside a Staff Handbook Package).

Notice Still Applies Even In Redundancy

Redundancy doesn’t cancel notice obligations. If the employee has the right to notice, you must:

• allow them to work it, or
• pay it (PILON), or
• agree an alternative termination arrangement (for example, via a settlement).

If you’re unsure about which approach best protects your business, it’s worth getting tailored advice early - particularly where the employee is long-serving, senior, or the redundancy situation is sensitive. (This is exactly the kind of scenario our Redundancy Advice support is built for.)

For a deeper look at timing and practical pitfalls, it’s also helpful to understand PILON rules in more detail.

How Do You Calculate Redundancy Pay In Lieu Of Notice?

To calculate redundancy pay in lieu of notice, you first need to confirm: what notice period applies.

Step 1: Work Out The Notice Period

Notice can come from:

• the employment contract (contractual notice), and/or
• the statutory minimum notice under the Employment Rights Act 1996.

As a rule of thumb, statutory minimum notice is:

• 1 week if employed between 1 month and 2 years
• 1 week per year of service if employed between 2 and 12 years (up to 12 weeks)
• 12 weeks if employed for 12 years or more

Many employment contracts provide more notice than the statutory minimum, particularly for managers and senior staff.

If you want a practical refresher on notice calculations in a redundancy scenario, redundancy notice periods are explained clearly here.

Step 2: Confirm What “Pay” Includes For PILON

This is where employers often get caught out.

Your PILON calculation should usually reflect what the employee would have received if they worked their notice. Depending on the contract wording and pay structure, PILON may include:

• basic salary
• regular allowances (if contractually due)
• contractual commission (where it would have accrued during notice)
• contractual bonuses (sometimes complex - depends on scheme rules)
• benefits that form part of remuneration (e.g. car allowance)

It may not automatically include discretionary bonus, irregular overtime, or benefits that are not contractual - but the answer depends heavily on the documents and the facts.

If you terminate immediately and underpay PILON (even by accident), you increase the risk of:

• a breach of contract claim,
• an unlawful deductions from wages claim, and/or
• a dispute that escalates the redundancy into something far more time-consuming than it needs to be.

Step 3: Add Accrued Holiday Pay And Other Final Payments

PILON is not the only final payment you may owe. A typical “final pay” calculation in redundancy includes:

• PILON (notice pay paid as a lump sum)
• accrued but untaken holiday pay
• statutory redundancy pay (if eligible)
• any enhanced redundancy pay promised by contract, policy, or custom and practice
• any expenses owed under company policy

Tip: create a simple termination checklist and use it consistently. It’s a small admin step that can prevent payroll errors and “you forgot X” disputes later.

Is PILON Taxable In The UK (And How Does It Interact With Redundancy Pay)?

Tax is a big reason employers want clarity around paying notice as PILON in redundancy.

In most cases, PILON and other notice-related amounts are treated as employment income and are subject to:

• Income Tax, and
• National Insurance contributions.

In practice, HMRC rules mean employers often need to identify a post-employment notice pay amount (often called PENP). This is the part of a termination package that relates to notice, and it is generally taxed as earnings - even if it’s described as “compensation” or bundled into a wider termination payment.

By contrast, a genuine redundancy payment (and other qualifying termination payments) may be eligible for different tax treatment, including a potential tax-free element up to a threshold (subject to HMRC rules and how the payment is structured).

A practical way to think about it:

• Notice-related pay (including PILON / PENP) = “money for the notice period” → typically taxed as earnings.
• Redundancy pay = compensation for job loss → may be taxed differently depending on the payment and the circumstances.

Because payroll and HMRC treatment can get technical quickly, it’s wise to involve your accountant or payroll provider early. From a legal side, make sure the paperwork clearly labels and describes payments properly - sloppy wording can create confusion about what is owed and what is being paid.

Note: This article is general information and isn’t tax advice. Tax outcomes can vary depending on the facts, your payroll setup and HMRC guidance.

What Are The Biggest Legal Risks With Redundancy PILON (And How Can You Avoid Them)?

PILON itself isn’t “risky” - it’s the way it’s used that creates problems.

Here are common pitfalls we see with small businesses, and the practical fixes.

1. Using PILON To Rush A Redundancy Process

Redundancy should still be handled fairly. Even where there’s a genuine redundancy situation, you’ll usually need to show you:

• identified a genuine redundancy reason,
• consulted properly (including considering alternatives), and
• applied a fair selection process if a pool is required.

PILON doesn’t replace consultation. If the employee has the right to bring an unfair dismissal claim (for example, they have 2+ years’ service), process matters.

2. No PILON Clause (Or A Vague One)

If your contract doesn’t clearly allow PILON, you can end up arguing about whether you were entitled to terminate immediately.

A well-drafted clause in the Employment Contract can make termination cleaner and reduce uncertainty about what gets paid (salary only vs salary + benefits etc.).

3. Getting The Payment Amount Wrong

This often happens where pay is variable (commission, overtime, allowances) or where there are benefits in kind.

To reduce the risk:

• check the contract and any relevant policies,
• confirm whether benefits continue through notice (or are compensated), and
• document your calculation assumptions.

4. Not Documenting The Termination Properly

When termination is messy on paper, you’re more likely to have follow-up emails, disputes, and delays.

At minimum, you’ll want a clear termination letter confirming:

• the dismissal is by reason of redundancy,
• the termination date,
• that notice is being paid as PILON (and what period it covers), and
• what other payments will be made (holiday, redundancy pay, etc.).

For more complex exits (for example, where you want additional protections like confidentiality, non-disparagement, or an agreed reference), you may consider a formal settlement document such as a Deed of Settlement.

Best-Practice Checklist For Employers Paying PILON In Redundancy

If you want a practical, “do-this-next” approach, here’s a checklist many small businesses follow to keep redundancy PILON compliant and consistent.

Before Termination

• Check the contract for notice provisions and any PILON clause.
• Confirm the redundancy process has been handled fairly (consultation, selection, alternatives).
• Decide whether you want notice worked or paid (PILON), and why.
• Prepare calculations for PILON, holiday pay, redundancy pay, and any other entitlements.

At Termination

• Issue a clear termination letter confirming redundancy and PILON arrangements.
• Confirm the termination date (this matters for benefits, system access, and final payroll).
• Deal with company property and access (laptops, phones, keys, passwords) in a structured way.

After Termination

• Pay on time and provide a breakdown so the employee can see what they’re being paid and why.
• Keep records of consultation notes, selection scoring (if relevant), and payment calculations.
• Review your templates afterwards so your next redundancy process is smoother (this is where a clear Staff Handbook Package can help).

And if you’re managing multiple redundancies, employees on maternity leave, or a redundancy pool where selection could be challenged, it’s worth speaking to a lawyer early - those are the situations where small mistakes can become expensive.

Key Takeaways

• Redundancy pay in lieu of notice usually means you’re making a redundancy dismissal and paying the notice period as a lump sum instead of having the employee work it.
• PILON is separate from redundancy pay - you may owe PILON, holiday pay, and redundancy pay as different components of the exit package.
• Check the notice period carefully (contractual and statutory) before calculating PILON, especially for long-serving employees.
• Confirm what “pay” includes in your PILON calculation (salary, allowances, commission, benefits) based on the contract and pay structure.
• Notice-related termination pay is generally taxed as earnings (including PILON / PENP), while redundancy pay may be treated differently depending on the nature and structure of the payment.
• PILON doesn’t replace a fair redundancy process - consultation and proper selection still matter, especially for employees with unfair dismissal rights.
• Clear documentation reduces disputes, and for higher-risk terminations you may want a formal settlement document to wrap up terms cleanly.

If you’d like help handling redundancies, reviewing your notice and PILON clauses, or preparing the right documents for a clean exit, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.