Being told that your employment will end can make the figures in a settlement agreement feel more urgent than they first appear. One of the most common areas of confusion is notice pay versus PILON. Both relate to the notice period you are entitled to, but they can affect your final working date, pay, benefits, tax position and the practical terms of your departure.
The right approach depends on your contract, the reason for the exit and the wording of the proposed agreement. Before you sign, you should be clear about exactly what each payment covers and whether anything you expected to receive has been left out.
What is notice pay?
Notice pay is the pay you receive during your notice period. Your minimum legal entitlement is known as statutory notice: normally one week’s notice for each complete year of service, up to 12 weeks, once you have worked for your employer for at least one month. However, many employment contracts provide a longer contractual notice period, particularly for senior or specialist roles.
If you work your notice, you remain employed until the notice period ends. You should generally continue to receive your usual salary and contractual benefits, such as pension contributions, private medical cover, car allowance or commission arrangements, subject to the terms of your contract. You remain bound by your employment duties too.
An employer may instead ask you not to attend work while remaining employed. This is usually called garden leave. You still receive normal pay through the notice period, but your employer may restrict access to systems, clients and colleagues. Garden leave is not the same as PILON, because the employment relationship continues until the agreed end date.
Notice pay versus PILON: the key difference
PILON means payment in lieu of notice. Rather than keeping you employed and paying you during notice, the employer ends the employment immediately and makes a payment to reflect the notice period.
The practical difference is significant. With worked notice or garden leave, your employment continues for a period of time. With PILON, your employment ends straight away, unless a settlement agreement specifies a different termination date. This may suit someone who wants to start a new role quickly, but it can also bring forward the end of benefits, pension contributions and the accrual of holiday.
A contract may contain a PILON clause setting out the employer’s right to make this payment. The clause should be checked carefully. Some clauses cover basic salary only; others include the value of contractual benefits, allowances, commission or bonus entitlement. The precise drafting matters.
Where there is no PILON clause, an employer may still propose an immediate termination as part of a settlement agreement. That agreement can set out the payment and bring claims connected with the termination to an agreed close. It should not be assumed, however, that a payment labelled “PILON” fully reflects what you are contractually owed.
How notice pay and PILON are taxed
Whether you work notice or receive PILON, amounts attributable to notice are normally subject to income tax and National Insurance contributions in the usual way. A PILON payment is not tax-free simply because it is paid after employment ends.
This point is often obscured when a settlement agreement presents one overall figure. A well-drafted agreement should separate payments into clear categories, for example unpaid salary, accrued but untaken holiday, notice pay or PILON, contractual bonus, statutory redundancy pay, an ex gratia termination payment and legal fees.
A termination payment that is genuinely compensation for loss of employment may potentially fall within the £30,000 tax exemption, but this does not apply to sums treated as notice pay. Tax rules concerning post-employment notice pay are technical, and the labels used by the employer do not determine the treatment on their own.
For that reason, focus on the substance of the payment. If part of the sum represents salary you would have earned during notice, it is likely to be taxed accordingly. Independent legal advice can help identify whether the proposed allocation is clear, realistic and consistent with the agreement.
What should a PILON calculation include?
Start with your notice entitlement. Check both your contract and any relevant policy documents, then identify the proposed termination date and the date your notice would otherwise have expired. The gap between those dates is usually the period the PILON is intended to cover.
Basic salary is only the starting point. Depending on your contract and normal remuneration, the calculation may also need to address regular allowances, contractual commission, bonus arrangements, benefits, pension contributions and share-based incentives. A payment that appears generous at first glance may be less so if it replaces several months of employment but excludes valuable benefits.
Holiday is a separate issue. On termination, you should normally be paid for accrued but untaken statutory holiday. Your agreement should show how holiday has been calculated, including whether holiday continues to accrue up to the termination date. If employment ends immediately under PILON, the answer may differ from a period of garden leave.
For employees on variable pay, the position can be more difficult. A sales employee nearing a commission trigger, for example, may need the agreement to deal expressly with pipeline sales and payment dates. A senior executive may need clarity on bonus criteria, deferred awards or long-term incentive plans. These are areas where the value at stake can be much higher than the headline PILON figure.
Notice pay in a settlement agreement
A settlement agreement is voluntary. It can be a sensible way to secure certainty around an exit, but you should not feel pressured to accept unclear terms merely because the employer has given you a short deadline.
The agreement should state whether you will work notice, be placed on garden leave or receive PILON. It should also give a clear termination date and payment date. If you are receiving PILON, check whether the sum is described as gross, what deductions will be made and whether it is additional to any compensation payment.
It is also worth checking the wider package. Notice pay can be an existing contractual or statutory entitlement, rather than the compensation offered in return for settling potential claims. In many cases, the negotiation is not only about increasing the total figure. It may also involve improving the reference, agreeing a helpful announcement, narrowing restrictive covenants, confirming treatment of bonus or commission, and ensuring confidentiality terms are fair and workable.
Five points to check before agreeing
- Your contractual and statutory notice entitlement, and which is more favourable.
- Whether PILON includes salary alone or also benefits, allowances, pension and variable pay.
- The agreed termination date, payment dates and treatment of accrued holiday.
- Which sums are taxable and whether the agreement separates them clearly.
- Whether notice pay is being presented as part of the settlement compensation when it is already due to you.
Can you negotiate PILON?
Often, yes. An employer may have a clear contractual right to make a basic PILON, but that does not necessarily settle every issue surrounding your departure. You may have a reasonable basis to seek payment for benefits, commission, bonus opportunity or another contractual entitlement that the initial calculation does not cover.
Your negotiating position will depend on the facts. It may be stronger where the contract is unclear, a redundancy process has not been followed properly, there is an unresolved grievance or discrimination concern, or the employer wants a prompt and confidential exit. Equally, an employer may take a firm position where its contractual right is clear and the payment has been calculated correctly.
The aim is not to turn every departure into a dispute. It is to ensure that you understand the proposal and do not waive valuable rights for less than a fair and properly explained package. Arcos Settlement Agreements can provide independent, plain-English advice on the agreement, the figures and the practical options available to you.
A proposed exit can move quickly, but the document you sign may shape your finances and your next career move. Take the time to establish what your notice entitlement is worth before deciding whether PILON gives you a fair outcome.