Post-Employment Notice Pay (PENP)

Post-Employment Notice Pay (PENP) was introduced in April 2018 to stop employers labelling unworked notice as 'compensation for loss of office' to take advantage of the £30,000 termination-payment exemption. It applies whenever an employee leaves before the end of their notice period and receives any payment connected with the termination.

The formula is: PENP = ((BP × D) / P) − T. BP is basic pay in the pay period ending nearest to the trigger date. D is the number of days of unworked notice. P is the number of days in the basic-pay period. T is any contractual PILON already taxed as earnings. The result is the slice of the termination package that must be taxed as ordinary employment income, regardless of how the settlement agreement describes it. Only the balance of the termination payment can benefit from the £30,000 exemption.

Worked example: Hassan is paid £4,000 a month and has three months' contractual notice. He is terminated immediately and receives a £25,000 settlement labelled entirely as 'ex-gratia compensation', plus £4,000 contractual PILON taxed as earnings. PENP = ((£4,000 × 90) / 30) − £4,000 = £12,000 − £4,000 = £8,000. So £8,000 of the £25,000 settlement is taxed as earnings (income tax + NI). The remaining £17,000 sits inside the £30,000 termination exemption and is income-tax free. Without PENP, Hassan would have escaped tax on the full £25,000; with PENP, £8,000 is dragged back into PAYE. PENP is reported via the FPS in the pay period the termination payment is made, and any Class 1A NIC on the excess over £30,000 (15% in 2026/27) is settled with the next P11D(b).