PILON and Redundancy Pay: Does One Affect the Other?

If your employer has just told you that your employment ends today and you'll receive a payment in lieu of notice, you probably have one immediate question: does this affect my redundancy pay?

The short answer is no. PILON and statutory redundancy pay are entirely separate entitlements, calculated independently from one another. But there is one important nuance that most employees — and some employers — are not aware of, and it can work in your favour.

What PILON is

Payment in lieu of notice (PILON) is a lump sum your employer pays instead of requiring you to work your notice period. Your employment ends immediately, and you receive the equivalent of what you would have earned during the notice period.

Since April 2018, all PILON is subject to income tax and National Insurance — regardless of whether your contract contained a PILON clause. This changed the rules that previously applied. If someone tells you that PILON without a contractual clause can be paid tax-free, that was true before 2018 but is no longer the case.

For a full comparison of PILON and working your notice, see our guide on PILON vs working your notice.

PILON does not reduce your redundancy pay

Receiving PILON does not reduce your statutory redundancy entitlement. The two calculations are completely separate:

• Redundancy pay is calculated using your age, your length of service, and your weekly pay (capped at £751 from April 2026). It compensates you for losing your job.
• PILON compensates you for the notice period you did not work. It is taxed as normal employment income.

Some employers present a single combined figure and describe it as "your redundancy payment." Always ask for a written breakdown showing each element separately — redundancy pay, PILON, and any accrued holiday pay. Each is calculated differently and taxed differently, and combining them without explanation is where errors and disputes most commonly arise.

The exception that can work in your favour

Here is the part most people do not know: in some circumstances, receiving PILON can actually increase your redundancy pay.

When calculating statutory redundancy pay, your employer uses what is called the "relevant date" — broadly, the date your employment ends. But if you are given PILON rather than working your statutory notice period, the relevant date is the date your employment would have ended had you worked your full statutory notice.

In practice, this means that if you are close to a service year boundary — for example, if you have worked 4 years and 11 months — the addition of a statutory notice period could push the relevant date past your 5-year anniversary, entitling you to an extra year of redundancy pay.

If you are near a service year boundary, it is worth checking whether this applies to your situation. Our calculator uses your employment dates to apply the correct rules automatically.

The £30,000 exemption and PILON

This is one of the most commonly misunderstood areas of redundancy taxation.

The first £30,000 of your redundancy pay is generally tax-free. PILON does not benefit from this exemption. Notice pay is always taxed as normal employment income, regardless of how much headroom exists under the £30,000 threshold.

So if your package is:

• Statutory redundancy pay: £7,500 — tax-free (within the £30,000 limit)
• PILON: £4,000 — taxed as normal income

The PILON is taxable in full. The two pots do not mix, and the £30,000 exemption does not absorb the PILON element even if you are well within the threshold on your redundancy pay alone.

What if you received no notice and no PILON?

If your employer gave you neither worked notice nor PILON, you have a claim for wrongful dismissal — the amount owed being the pay you should have received during your notice period.

This is a separate claim from your redundancy pay entitlement, and the two amounts are additive. You can pursue both. The time limit for a wrongful dismissal claim in the Employment Tribunal is 3 months less one day from the date of dismissal.

Checking your redundancy pay is correct

Because PILON and redundancy pay are calculated separately, an error in one does not necessarily mean there is an error in the other. The most common mistakes employers make in redundancy calculations are:

• Applying the wrong weekly pay cap for the dismissal date
• Failing to correctly account for age band crossovers in long-serving employees
• Using net pay rather than gross pay in the weekly pay figure
• Miscounting years of service — particularly around the relevant date when PILON is involved

Our calculator applies the current rules automatically, including the correct cap for your dismissal date and the age band calculation working backwards through your service history. It takes about two minutes and is free to use.

See our guide on what counts towards your redundancy pay calculation for the full rules on weekly pay, overtime, and bonuses.