Post-employment notice pay - two changes this week that may require employers to update their processes

United Kingdom

Further changes to the application of the post-employment notice pay (“PENP”) rules were introduced on 6 April 2021.

Recap of current position

By way of reminder, in April 2018, HMRC removed the distinction between contractual and non-contractual payments in lieu of notice (“PILONs”) – previously, only contractual PILONs were taxable. In order to prevent parties avoiding the new rules by labelling PILONs as compensation for the loss of  employment (a “Compensation Payment”) - which can be paid without deduction for income tax and national insurance contributions (“NICs”) up to a maximum of £30,000 - HMRC introduced the concept of PENP.  

Where an employee is receiving a Compensation Payment and is not serving their whole notice period, the HMRC PENP calculation needs to be followed to ensure that sufficient tax and NICs are being paid. If the calculation produces a positive figure, an employer will be required to subject an amount of the Compensation Payment equivalent to the PENP figure to deductions for tax and NICs. No further tax or NICs are due if the statutory calculation produces a nil or negative PENP.

New rules

Changes to calculation

In October 2019 HMRC introduced an alternative formula that could be used for employees who are paid monthly but who have a contractual notice period defined in weeks or days, or where the post-employment notice period is not a whole number of months. This was in recognition of the fact that if the last pay period falls in a short month (e.g. February), the calculation can be skewed and result in a higher PENP than if the last pay period fell in a longer month (e.g. March). The alternative calculation seeks to remedy this anomaly.

To date, the alternative calculation has been optional and could only be used where it is in the employee’s favour. However, its use is now mandatory where such an employee’s employment is terminated and they receive a termination payment on or after 6 April 2021. You can read more about the specific calculation in our previous Law Now.


Take the example of an employee who is paid monthly in arrears on the last day of the month. Their salary is £60,000 and they are entitled to 12 weeks’ notice. Their employment is terminated with immediate effect on 5 March 2021 with no PILON. The employer agrees to pay them a compensation payment of £30,000. Applying the PENP calculation:

PENP = (BP x D)
                  P              - T

BP = basic pay in the last pay period before (i) if the employee is serving part of their notice, the date that notice is served or (ii) if the employee is receiving a payment in lieu of their entire notice period, the last date of their employment. In this case, the basic pay is their monthly salary in February, which is £5,000.

P = under the old calculation this would be 28 (the number of days in the February pay period, which is the last full pay period before notice is given). However, under the new calculation, P is 30.42

D = number of days in the notice period which fall after the end of employment, in this case 84 (i.e. 12 weeks’ notice x 7 days).

T = the sums (other than holiday pay and termination bonuses) paid on termination but taxable as earnings – this will usually be a PILON. In this case, T is 0.

Old calculation

PENP = (BP x D)
                  P              - T

          = (£5,000 x 84)

                   28          - £0

          = £15,000

New calculation

PENP = (BP x D)
                  P              - T

          = (£5,000 x 84)

                   30.42          - £0

          = £13,807

Under the new calculation, the PENP is £13,807, meaning only £13,807 of the £30,000 compensation payment would be subject to deductions for tax and employee NICs. Under the old calculation, this figure would be £15,000.

Territorial reach

The tax treatment of PENP for individuals who are non-resident in the UK in the year their UK employment terminates is now aligned with the treatment of UK residents. This change only affects employees who physically performed the duties of their employment in the UK and will apply where their employment is terminated and they receive a Compensation Payment on or after 6 April 2021. Previously such employees (or former employees) not resident in the UK for the tax year in which their employment terminates were eligible for foreign service relief in relation to PENP.

Impact on employers

Employers should review their process for calculating PENP to ensure that they take into account the change in the rules and that they (and the employee) are paying the correct tax and NICs on any PENP.