Payment in lieu of notice (PILON)

Payment in lieu of notice (PILON) is the notice pay an employer makes when employment ends without the employee working their full notice.

For global payroll teams, the real question isn't whether you can pay PILON. It's how the payment gets taxed in each country: as salary, as a termination payment, or with employer social contributions on top. The answer changes by jurisdiction.

The UK runs PENP rules under ITEPA 2003 s.402D, which tax notice-pay value as earnings. Ireland treats contractual PILON as taxable pay, with exemptions only for non-contractual cases.

France handles the same operational issue under a different label: indemnité compensatrice de préavis, taxed like salary with employer social contributions added. The US has no statutory PILON. Pay instead of worked notice is severance or final wages, taxed as wages by the IRS.

What does PILON mean in payroll?

In payroll, PILON is a transaction code, not a separate category of pay. The employer pays a lump sum equal to the salary the employee would have earned during notice, and payroll runs it through the same gross-to-net calculation as a normal payslip.

PILON vs worked notice

Worked notice, garden leave, PILON, and severance sit in different places on a payroll. Choosing between them changes the cycle, the cash timing, and the contractual exposure.

• Worked notice: employee remains employed and paid through payroll across the full notice window.
• PILON: employment ends immediately or early, with notice value paid as a lump sum or final payroll line.
• Garden leave: employee remains employed and on payroll but is barred from working.
• Severance: separate termination compensation, often statutory, not always the same as notice pay.

Why PILON matters in global payroll

A notice-pay decision sends ripples through payroll, tax, and operations. For multi-country buyers, the same questions come up every termination.

• Final payroll timing: single-cycle close versus spread across two cycles.
• Tax treatment: ordinary earnings, termination payment, or country-specific exemption.
• Employer social security: applies whenever the payment is treated as salary.
• Holiday accrual: stops at the termination date, with any unused entitlement paid out.
• Benefits cut-off: health, pension, and insurance continuations close.
• Termination cost modelling: requires the full set of lines, not just gross salary.
• EOR responsibility: provider runs the mechanic; the buyer owns the decision.
• Local law approval: civil-law countries often require documented cause or mutual agreement.

When is notice pay treated like salary?

In most payroll regimes, notice pay is treated as salary by default: taxed and contributed against like a normal payslip. Exceptions are narrow and usually hinge on whether the payment is in the contract.

Contractual PILON

If the contract includes a PILON clause, payroll treats the payment as expected earnings. It runs through gross-to-net under standard codes, attracts employee and employer social contributions, and feeds the same year-to-date totals as salary.

Non-contractual PILON

When the contract is silent and the payment is offered as part of a settlement, treatment varies more by country. In the UK, PENP rules force salary treatment regardless.

In Ireland, a Basic, Increased, or SCSB exemption may apply. In civil-law countries, it usually comes down to whether the payment is documented as notice indemnity or as severance.

Salary, severance or termination compensation?

The table below is the operational test most payroll teams apply.

Payment type	Payroll treatment	Tax risk	Buyer question
Worked notice pay	Standard salary across cycle	Low	Are dates and final cycle scheduled?
Contractual PILON	Salary, single cycle	Low if payroll codes correct	Is the PILON clause in the contract?
Non-contractual PILON	Country-specific; often salary	Medium; classification disputes	Does any exemption apply?
Severance pay	Termination payment; may use exemptions	Medium; often statutory	Is it statutory, contractual or ex-gratia?
Redundancy compensation	Statutory plus discretionary top-up	Medium; documentation-dependent	Is the redundancy procedure documented?
Holiday pay on termination	Salary; final cycle	Low	Has accrual been settled to leave date?

These classifications are not interchangeable. The same amount can sit on three different lines and produce three different tax and contribution outcomes.

How does PILON tax differ by country?

PILON is a UK and Ireland term, but global payroll teams face the same issue elsewhere: how to tax and cost pay given instead of worked notice.

Country	Local concept	Usual tax treatment	Employer cost issue	Buyer check
UK	PILON / PENP	Ordinary earnings since April 2018	Employer NI at 15% on PENP element	Has PENP been calculated?
Ireland	Contractual PILON	Taxable as wages; exemptions for non-contractual	PRSI and USC on contractual element	Is the payment contractual or settlement?
France	Indemnité compensatrice de préavis	Salary for income tax and social contributions	Employer charges 22% to 27% on top	Has the indemnity been quantified?
US	Severance / final wages	Wages; FICA, FUTA, federal income tax	Employer FICA at 7.65% to wage base	Do state final-pay rules apply?

UK: PILON, PENP and taxable earnings

The UK position changed on 6 April 2018. Before then, contractual PILON was taxable as earnings, but non-contractual PILON could be paid under the £30,000 termination-payment exemption.

The Finance (No. 2) Act 2017 introduced the Post-Employment Notice Pay (PENP) rule, codified at ITEPA 2003 section 402D.

PENP now taxes any notice-pay portion of a termination payment as ordinary earnings, with or without a PILON clause in the contract. The HMRC manual (EIM13874) sets out the formula: BP × D / P, where BP is basic pay, D is unworked notice days, and P is the pay period.

Buyers should check whether the EOR or in-house payroll team calculates PENP, or whether their legal adviser provides the figure. The UK payroll glossary covers the wider PAYE and termination-payment picture.

Ireland: contractual PILON and termination-payment exemptions

Irish Revenue (eBrief 02/2018) treats contractual PILON as taxable pay, with no access to the termination-payment exemptions. Non-contractual termination payments can still qualify for the Basic Exemption (€10,160 plus €765 per year of service), the Increased Exemption (a further €10,000 in some cases), or the Standard Capital Superannuation Benefit.

Payroll teams need to be clear whether the payment runs through payroll as pay, as exempt termination compensation, or as a mix of both.

France: notice indemnity and social contributions

France doesn't use "PILON" as a label. The equivalent is indemnité compensatrice de préavis, governed by Code du travail Article L1234-5. It's treated as salary for both income tax and employer social contributions, with no severance exemption.

Employer social charges in France add roughly 22% to 27% on top of the gross indemnity, depending on the salary band. See the France country guide for what this looks like in practice.

US: severance, final wages and state-level rules

The US has no federal statutory requirement for notice or severance. Pay given instead of worked notice is treated as severance or final wages, both of which the IRS counts as wages (Rev. Rul. 90-72).

FICA, FUTA, and federal income tax withholding all apply, with state income tax following the relevant state rule.

State final-pay timing rules matter too. California requires immediate payout on involuntary termination; Texas allows up to six days. The payroll question is which bucket the payment falls into, and which state rule governs the timing.

Which employer costs apply to PILON?

The headline gross is usually the smallest line on the exit calculation. Five other cost lines stack on top.

Cost line	When it applies	Why buyers miss it	Who confirms it
Employer social security	Whenever payment treated as wages	Not visible on gross figure	EOR or in-house payroll
Payroll tax	Country-specific (e.g. UK apprenticeship levy)	Levied above wage threshold	Finance or tax adviser
Pension contributions	Until termination date	Stop date unclear in PILON	Payroll plus benefits provider
Holiday accrual	Accrued but unused leave	Conflated with notice pay	HRIS plus payroll
Benefits continuation	Health, life, statutory	Cut-off date depends on rule	Benefits administrator
Severance overlap	When notice and severance both due	Treated as one payment	Legal plus payroll
EOR service fees	Coordination charge on exits	Not in monthly seat fee	EOR account manager
FX and payroll funding	Lump sum on funding cycle	Cash hits earlier than expected	Treasury plus EOR

Employer social security and payroll taxes

When the payment is treated as salary, employer contributions apply wherever the local payroll system levies them. UK employer National Insurance runs at 15% on the PENP element.

French employer social charges run 22% to 27% on the indemnity. US employer FICA runs 7.65% up to the wage base. See the employer contributions entry for the full per-country loading.

Holiday, benefits and pension knock-on costs

The termination date drives all three. Accrued holiday pays out in the final cycle.

Pension contributions stop on the date the employment ends, not at the end of the original notice window. Benefits continuation (health insurance, life cover) follows the contractual cut-off rule.

For multi-country buyers, accurate employment cost modelling means counting every line on the exit table, not just the visible gross.

EOR deposits and termination-cost forecasting

Some EOR providers ask for a deposit or upfront funding to cover termination costs, especially when severance, notice pay, holiday pay, and local contributions all land in one cycle. Treasury teams should map the payroll funding cycle against expected exit costs at the start of any year where restructures are planned.

What does an EOR usually handle?

The split between what the provider does and what the buyer decides is broadly consistent across EOR contracts. The table below shows the typical assignment.

Task	EOR handles	Employer input required	Buyer risk
Local termination workflow	Yes	Reason and approval	Procedural defect
Final payroll calculation	Yes	Approval of figures	Cost variance
PILON or notice calculation	Usually	Contract clause confirmation	PENP error
Tax withholding	Yes	None	Misclassification
Employer contributions	Yes	Funding	Cash timing
Country-specific filings	Yes	None	Late filing penalty
Employment contract review	Often	Provide original	Clause gaps
Legal sign-off	No	Buyer counsel	Discrimination claim
Employee communication	Optional	Joint script	Reputational risk
Payment timing	Yes	Funding window	Late-payment claim

What the EOR calculates

The provider handles the payroll mechanics: final salary, notice pay, tax withholding, social contributions, payslip lines, and local statutory filings. They draft the termination letter and process the lump sum through the same payroll run as the final accrued-leave payout. See the payroll reconciliation entry for the variance-tracking workflow.

What the employer still owns

The substantive decisions stay with the buyer: reason for termination, contract terms, approval trail, whether to terminate immediately or after worked notice, budget sign-off, and any settlement above the statutory floor. The EOR provides the figures; the employer makes the call.

What to check in the EOR contract

• Does the contract define termination support, or is it scoped separately?
• Are notice payments included in standard payroll processing or charged extra?
• Are legal reviews included or billed against an hourly rate?
• Who calculates employer-contribution exposure on the exit cycle?
• How much advance notice does the EOR need before processing a termination?
• Can the EOR refuse or delay a termination instruction?
• Are deposits or pre-funding required ahead of severance or PILON payments?

What should payroll buyers check before approving PILON?

Two checklists: one internal, one for the provider.

Payroll buyer checklist

• Is PILON permitted in the employment contract?
• Is the payment contractual, statutory, discretionary, or negotiated?
• Will the employee work any part of the notice period?
• What is the legal termination date?
• Is the payment treated as salary, severance, or mixed compensation?
• Are employer social contributions due?
• Does holiday continue to accrue to the new termination date?
• Are pension or benefits affected by the early end?
• Does local law require consultation, documentation, or approval?
• Can the EOR process the termination within the required payroll cycle?
• Has total employer cost been modelled across all lines before approval?

Questions to ask your EOR or payroll provider

• How will this payment appear on the payslip?
• Which tax code or payroll category applies?
• Are employer contributions included in the cost estimate?
• Is any part exempt from tax or separately reportable?
• What final-payroll cutoff applies for this cycle?
• What local legal sign-off is needed before processing?
• Will the employee receive a termination letter, payslip, and settlement document?

PILON payroll example

Illustrative UK example: a leaver on £60,000 annual salary, three months of unworked notice, contractual PILON clause. Figures are rounded; exact treatment depends on country, contract, and provider.

Item	Amount	Payroll treatment	Notes
Final salary	£2,500	Salary, current cycle	Half-month worked
PILON (PENP element)	£15,000	Ordinary earnings, single cycle	3 months at £5,000
Unused holiday	£1,200	Salary, current cycle	5 accrued days
Severance (statutory)	£0	N/A	Mutual termination, no redundancy
Employer National Insurance	£2,805	15% on £18,700	Includes PILON and holiday
Total employer cost	£21,280	Single cycle	Cash hits current quarter

The £5,000 monthly notice equivalent is the smallest line. The total employer cost (£21,280) is more than four times that once PENP, holiday, and employer NI are factored in.

PILON FAQs

Is PILON taxable?

Yes. In the UK and Ireland, contractual PILON is taxed as ordinary earnings. Since April 2018, the UK PENP rule extends that treatment to non-contractual notice pay too. Employee and employer National Insurance, PAYE, and PRSI all apply. Other countries tax PILON-equivalent payments as wages under their own payroll rules.

Is PILON the same as severance pay?

No. PILON is the notice pay an employer makes when they end employment without asking the employee to work their notice. Severance is separate compensation paid when a role is eliminated or terminated, often statutory. The two can be paid together but sit on different payroll lines. See the severance pay entry for the parallel concept.

Does PILON go through payroll?

Yes. PILON is a payroll transaction in every country that recognises it. The lump sum runs through the local gross-to-net calculation, attracts PAYE or equivalent withholding, and triggers any employee and employer social contributions due. The final payslip records the PILON line separately from worked salary and accrued holiday.

Can an EOR process PILON?

Yes, in most countries where the EOR is the legal employer. The provider drafts the termination letter, runs the PILON calculation under local rules, processes the payment through the same cycle as the final salary, and remits any employer-side social charges. See the EOR compliance entry for the full responsibility split.

Does PILON apply outside the UK?

"PILON" itself is UK and Ireland terminology. Other countries have parallel concepts under different names: France's indemnité compensatrice de préavis, Germany's Aufhebungsvertrag, and US severance. Each runs on its own tax and social-charge rules. Misclassification across markets can also trigger downstream worker misclassification exposure.

For the broader notice and termination toolkit across countries, see the notice period entry.