When Should Pay In Lieu Of Notice (PILON) Be Paid In The UK? Understanding Employer Obligations

If you’re running a business in the UK or managing staff, you might already know that employment contracts can come to an end in a variety of ways. One area that often causes confusion is Pay In Lieu Of Notice (commonly called PILON).

When an employee leaves, do you have to pay them notice? What if you want them to go immediately? And, crucially, when should PILON be paid UK?

This guide will walk you through exactly what PILON is, when it should be paid, your legal obligations as an employer, and the best practices to protect your business. We’ll break down common scenarios, explain your options, and flag key risks if you get it wrong. Ready to clear up the confusion? Keep reading.

What Is Pay In Lieu Of Notice (PILON)?

Let’s start with the basics. Pay In Lieu Of Notice (PILON) is a payment made to an employee when you, as the employer, decide not to have them work out their notice period. Instead of the employee working for their notice (for example, four weeks), you pay them the amount they would have earned during that period, and their employment ends immediately.

PILON is commonly used in situations where you don’t want the employee to stay in the workplace for their notice-for example, if you’re worried they could disrupt the team or access confidential information.

Legally, if you choose to pay PILON, you’re bringing the employment to an immediate end. The key is making sure you calculate the payment correctly and pay it at the right time.

When Should PILON Be Paid In The UK?

The timing of when to pay PILON can be critical. In the UK, you should pay PILON:

• On the date employment ends: The payment should be made on the employee’s final day of employment, which is the same day they are officially leaving (not the date the notice would have run out).
• As soon as possible after dismissal: Where immediate payment on the leaving date isn’t possible (for administrative reasons), it should be paid as soon as reasonably practicable-usually with the final payslip.
• In line with employment contract terms: If your contract sets a specific timeframe for final payments (such as “all sums due on termination will be paid on the final day”), you must comply with this.

Waiting until the end of what would have been the notice period is not correct. Once you pay PILON and the employee leaves, their employment is terminated and all associated payments-including accrued holiday, final salary, expenses-are typically due right away.

If you’re changing your mind and want the employee to serve out notice instead, make sure you properly update their employment contract and get their agreement to avoid disputes.

Do You Always Have To Pay PILON When Dismissing An Employee?

No-you only have to pay PILON if:

• Your employment contract gives you the right to do so (a “PILON clause”).
• You want the employee’s employment to end immediately, rather than them working their notice period.
• You choose not to have them work their notice, even if there isn’t a PILON clause (but in this scenario, you still may be contractually or legally obliged to pay for the notice period).

If an employee is dismissed for gross misconduct, they can be terminated without notice or PILON. But beware-gross misconduct must be serious, and unfairly denying pay can expose your business to Employment Tribunal claims.

If there’s no PILON clause in your contract and you pay instead of having the employee work notice, this may technically be a breach-so the employee could claim damages. In practice, though, most employees will simply accept the payment.

It’s good practice for all modern employment contracts to include a clear PILON clause. If you’re unsure if yours does, consider a review-here’s what staff contracts should include.

What’s The Difference Between PILON And Garden Leave?

These two can be confusing. Here’s the difference:

• PILON (Pay In Lieu of Notice): The employee’s employment ends immediately, and they get paid for the notice period instead.
• Garden Leave: The employee technically remains employed, but doesn’t attend work (and usually can’t start a new job), and is paid as normal during their notice period.

With PILON, their employment ends on the payment date-with garden leave, it continues through the notice, even though they’re not working. Both tools give employers some control, but they have different effects on things like benefits, share options, and post-employment restrictions.

How Is PILON Calculated?

When you pay PILON, the aim is to ensure the employee isn’t financially worse off than if they’d worked their notice. The calculation typically includes:

• Basic salary for the full notice period (as set in the contract or by law)
• Any contractual benefits (such as car allowance, health insurance) that would have accrued during notice-if contractually required
• Accrued but untaken holiday (pro-rata up to the last day of employment)
• Reimbursement of reasonable expenses and any outstanding bonuses, if contractually due

The precise calculation should follow what’s set out in the employment contract. If in doubt, or if your contract is unclear, it’s worth seeking legal input before making the payment.

Are There Tax Implications When You Pay PILON?

Yes-PILON is nearly always taxable income for the employee. It’s subject to normal income tax and National Insurance deductions.

Since April 2018, even if your contract doesn’t require PILON (i.e. you’re in technical breach by paying it), HMRC expects all PILON to be taxed as earnings.

You’ll need to process PILON through PAYE just like salary. Don’t be caught out by thinking it’s a tax-free payment-it almost never is.

Unsure about the tax side? You may want to consult with both your legal adviser and accountant to avoid mistakes.

Does PILON Affect Other Employee Rights And Entitlements?

Yes, the way you pay PILON can impact an employee’s ongoing benefits and statutory rights. Here are a few things to keep in mind:

• Pension and Benefits: With PILON, employment ends immediately, so access to workplace pension, health insurance, or other contractual benefits usually ends at the termination date.
• Redundancy Pay: PILON does not replace statutory redundancy pay. If the employee is being made redundant, they may be entitled to both PILON and redundancy pay. Make sure you understand redundancy entitlements.
• Holiday Accrual: Employment ends on the PILON date, so holiday stops accruing then. You must pay out any days the employee has earned but not taken.
• Restrictive Covenants: Many post-employment restrictions (like non-competes) start from the “termination date”-with PILON, this is the day they leave, not the end of the notice.

These small details can matter a lot if you have valuable business secrets or customer lists you need to protect.

PILON And Employment Contracts: What Should Employers Include?

Strong contracts are crucial. Here’s what your employment contract should clarify around PILON:

• PILON Clause: A clear provision allowing you to make a payment instead of requiring the employee to work out their notice.
• Calculation Method: Precisely how PILON is calculated-salary alone, or salary plus benefits?
• Timing: State when PILON will be paid (ideally, “on termination” or with the final payslip).
• Interaction with Other Pay: Spell out what happens to bonuses, commissions, pension, and benefits if PILON is paid.

Having well-drafted agreements avoids misunderstandings and claims later. If your contracts are out of date or vague, now’s a good time to review them-read more about express terms.

What If You Don’t Pay PILON Correctly?

Getting PILON wrong exposes your business to multiple risks:

• Employment Tribunal claims: Failure to pay PILON or paying it late can lead to unfair dismissal or breach of contract claims.
• Tax penalties: Incorrect tax handling risks HMRC penalties.
• Loss of trust and reputation: Employees and ex-employees talk-word of poor practices gets around and can affect recruitment.

Most issues are avoidable by setting up clear procedures, using up-to-date contracts, and making payments on time. If you’re unsure, a quick chat with a legal expert can save bigger headaches later.

Managing Risk: Best Practices For Handling PILON

To keep things running smoothly and avoid disputes, here are some top tips:

• Always use clear, up-to-date employment contracts that address PILON.
• Communicate openly with employees if you intend to pay PILON-set expectations from the start.
• Ensure all termination payments (salary, PILON, holiday, redundancy, expenses) are made promptly, and keep written records.
• Understand statutory vs contractual notice periods and pay accordingly.
• Double check your tax and payroll processes for terminations, including correct handling of PILON.
• If you’re making redundancies, be clear on how PILON interacts with statutory redundancy pay-see our complete guide to redundancy laws.

It can be overwhelming to stay on top of these requirements-especially if you manage a growing team. If in doubt, check in with a specialist who understands employment law.

Key Takeaways

• PILON allows you to end employment immediately by paying notice, rather than having the employee work it out.
• PILON should be paid on or as soon as possible after the employee’s final day-not at the end of the notice period.
• A clear PILON clause in your employment contract is critical for flexibility and minimising claims.
• PILON is taxed like salary and should be processed via PAYE; don’t assume it’s tax-free.
• Check how PILON interacts with other termination payments like holiday and redundancy.
• Making errors with PILON can lead to costly legal and reputational risks-get advice if you’re unsure.
• Regularly review and update your contracts, policies, and processes to keep compliant.

If you need advice on PILON, updating your employment contracts, or other employment law matters, our team is here to help. Contact us today at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.