How does the statutory PENP formula work?

Under Section 402D ITEPA 2003, the formula is: PENP = ((BP x D) / P) - T. Here, 'BP' is the employee's basic pay in the last pay period prior to termination; 'D' is the number of unworked notice days in the notice period; 'P' is the number of days in the calculation pay period (typically 30.42 days for monthly pay); and 'T' is any contractual PILON or amounts already taxed as employment earnings.

Can PENP be covered by the £30,000 tax-free redundancy exemption?

No. The statutory £30,000 termination exemption under Section 401 ITEPA 2003 only applies to payments that are NOT earnings. Because PENP is deemed by law to be general employment earnings, it must be carved out first and taxed in full. The £30,000 exemption can only be applied to the remaining severance or redundancy award after PENP has been deducted.

Is employee National Insurance charged on severance over £30,000?

No. Under statutory UK payroll law, amounts of genuine redundancy or ex-gratia compensation exceeding £30,000 are subject to PAYE Income Tax, but they are completely EXEMPT from employee Class 1 National Insurance contributions. However, the employer must pay Class 1A NICs at 15.0% on the excess above £30,000.

What is the difference between contractual PILON and PENP?

Contractual PILON is notice pay paid explicitly pursuant to a PILON clause in an employment contract. Historically, employers without a PILON clause attempted to classify unworked notice as non-taxable 'damages for breach of contract' under the £30k exemption. PENP was introduced by Parliament to close this loophole by taxing all unworked notice identically, regardless of contract wording.

How do unworked notice days affect PENP if I work part of my notice?

The value of 'D' (unworked notice days) is reduced for every day of notice you actually work or serve. If your contract requires 3 months of notice and you work 1 month, only the remaining 2 unworked months are subjected to the PENP calculation, substantially lowering your taxable PENP amount and increasing the portion eligible for the £30,000 exemption.

Are bonuses and benefits included in Basic Pay (BP)?

No. Under Section 402D(6) ITEPA 2003, Basic Pay (BP) strictly excludes bonuses, overtime payments, commission, tips, benefits in kind, and share option awards. It consists solely of the employee's core contractual basic salary.

Statutory 2026/27 ITEPA Section 402D Engine

PILON & PENP Tax Calculator UK

Calculate Post-Employment Notice Pay (PENP) and Payment in Lieu of Notice (PILON) under Section 402D ITEPA 2003. Check your £30,000 statutory redundancy exemption and exact net settlement.

Common PENP Severance ScenariosSelect a preset to load example

1. Salary & Notice Period

Contractual Basic Annual Salary (BP)£54,000 / yr

Basic pay only; exclude bonuses, overtime, commissions, and BIK benefits.

Notice Period Required

Notice Unit

Notice Days Actually Worked / Served0 days

Remaining unworked notice days (D): 91 days

2. Severance Settlement Package

Total Redundancy / Settlement Package£40,000

Total sum payable on termination (excl. accrued holiday pay).

Contractual PILON Already Taxed (T)£0

Any contractual notice pay already processed as taxable earnings.

Your Marginal Tax Band

Statutory Net Take-Home Result2026/27 Tax Year

Total Settlement

£40,000.00

Total HMRC Tax & NI

-£5,653.85

Net Take-Home Pay

£34,346.15

£26,538.46 of your package is completely tax-free under Section 401 ITEPA 2003. PENP of £13,461.54 is taxed as ordinary salary.

Section 402D ITEPA 2003 Statutory PENP Formula

PENP = ((BP × D) / P) - T

PENP = ((£4,500 × 91) / 30.42) - £0

= £13,461.54 taxable as General Earnings

BP (Basic Pay)£4,500 / mo

D (Unworked Days)91 days

Severance Allocation & Deductions Breakdown

1. PENP Notice Element (General Earnings)

Subject to PAYE Income Tax & Class 1 Employee NIC

£13,461.54

Income Tax (40%):-£5,384.62

Employee NIC (2%):-£269.23

2. Tax-Free Statutory Exemption (s.401 ITEPA)

Up to £30,000 statutory limit is 100% free of Income Tax & NIC

£26,538.46

The PENP Legislation: Why Notice Pay Cannot Be Shielded

Prior to April 2018, employers and employees negotiating settlement agreements frequently drafted severance packages without PILON clauses, attempting to categorise unworked notice payments as tax-free "damages for breach of contract" within the £30,000 exemption under Section 401 ITEPA 2003.

To eliminate this tax disparity, Parliament introduced Sections 402A to 402E ITEPA 2003. Under these rules, any payment representing notice that the employee would have received had they worked their full contractual notice period is statutorily defined as Post-Employment Notice Pay (PENP). PENP is treated as general employment earnings and must be carved out and subjected to PAYE Income Tax and Class 1 National Insurance before any £30,000 exemption is applied.

Understanding the Formula: ((BP × D) / P) - T

Section 402D(1) of ITEPA 2003 sets out the mandatory statutory mathematical formula:

BP (Basic Pay):The employee's contractual basic pay in the last pay period ending prior to the trigger date. It strictly excludes bonuses, commission, overtime, benefits in kind, and pension contributions.

D (Notice Days): The number of days in the post-employment notice period (the unworked notice days). If notice was 90 days and 0 days were worked, D = 90.

P (Calculation Period Days): The number of days in the basic pay period. For a monthly paid employee where the notice period is in whole months, P is 30.42 days (365 ÷ 12).

T (Amounts Already Taxed): Any contractual PILON or other payments already subjected to Income Tax and Class 1 NICs upon termination.

Statutory Order of Priority for Severance Payments

1. PENP Carve-Out

The PENP sum is extracted first. Treated as general earnings: subject to PAYE Income Tax (20%/40%/45%) and Class 1 employee NIC (8%/2%).

2. Tax-Free £30k S.401

The balance of genuine redundancy or ex-gratia compensation up to £30,000 is 100% tax-free and exempt from employee/employer NIC.

3. Excess Over £30k

Any remaining redundancy pay above £30,000 is subject to Income Tax. Crucially, employee NI is 0%, though employers pay 15% Class 1A NIC.

Strategic Tip: Working Partial Notice to Minimise PENP

Because PENP is directly proportional to unworked notice days ("D"), every day you work of your notice period reduces the PENP amount that must be taxed as earnings. If you have an amicable transition, serving even 2 to 4 weeks of notice can shift several thousand pounds from heavily taxed PENP into the tax-free Section 401 £30,000 redundancy bucket.

Frequently Asked Questions

Clear answers based on official HMRC rules and statutory guidance.

Post-Employment Notice Pay (PENP) is a statutory calculation introduced under Sections 402A to 402E of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). It ensures that all payments representing notice pay on termination—whether or not there is a Payment in Lieu of Notice (PILON) clause in the employment contract—are treated as general earnings subject to PAYE Income Tax and Class 1 National Insurance contributions.

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Separate the payment types

Statutory redundancy pay depends on age, complete years of service, weekly-pay limits and the termination date. Pay in lieu of notice and holiday pay are different payment types.

The £30,000 exemption is not a blanket exemption for all money paid on leaving a job. Contractual entitlement, PENP and employer NI can require specialist review.

Check the rules for your circumstances

Official guidance supports the rules described here; it does not approve or certify this calculator. Confirm dates, eligibility and unsupported cases before making a financial decision.