Payment in lieu of notice (PILON) is when an employer ends your job straight away and pays you for the notice period instead of having you work it. In the UK it's only allowed if your contract has a PILON clause or you agree to it. The payment should match what you'd have earned during notice, and in the UK it's taxed as earnings, not as a tax-free termination payment.
PILON sounds simple, but three questions decide whether you're being treated fairly: was the employer allowed to do it, does the amount include everything it should, and how is it taxed? Here's what the official guidance says, as of October 2026, in the UK, Australia and Ontario.
When an employer can use PILON
| Place | When it's allowed | What the payment must cover |
|---|---|---|
| UK | If the contract includes a PILON clause, or you agree to it | All basic pay for the notice period, plus contractual extras such as pension or private health contributions |
| Australia | The employer can choose to pay out some or all of the notice period | The full amount you'd have been paid, including bonuses, loadings, allowances, overtime and penalty rates |
| Ontario | Required if the employer doesn't give the written notice the ESA requires | Regular wages for the notice period, plus vacation pay on it and continued benefit contributions |
GOV.UK is direct for UK employees: you can only get payment in lieu if it's in your contract or you agree to it, and if you don't agree, you can work out your notice period. In redundancies, it adds that an employer may still offer PILON when the contract doesn't mention it, and if you accept, you should receive full pay and any contractual extras.
What the payment should include
This is where shortfalls happen. Fair Work Australia says the payment must equal the full amount the employee would have been paid if they'd worked until the end of the notice period, and lists what that includes:
- Incentive-based payments and bonuses.
- Loadings.
- Monetary allowances.
- Overtime.
- Penalty rates.
- Any other separately identifiable amounts.
In the UK, GOV.UK says notice pay in a redundancy is based on your average weekly earnings over the 12 weeks before notice starts, and bonuses and commission are due during notice unless your contract says otherwise. Employers paying PILON still have to pay pension, private health care or other contributions if they're in the contract.
A worked example from Ontario
Ontario's guide calls it termination pay in lieu of notice and gives this example. Sarah worked three and a half years, 40 hours a week at $20.00 an hour, with 4% vacation pay, and was let go without written notice. She's owed three weeks:
| Step | Calculation | Amount |
|---|---|---|
| Regular weekly wages | $20.00 x 40 hours | $800.00 |
| Termination pay | $800.00 x 3 weeks | $2,400.00 |
| Vacation pay on it | 4% of $2,400.00 | $96.00 |
| Total | $2,400.00 + $96.00 | $2,496.00 |
The employer must also keep her benefit and pension plan coverage going for those three weeks. Our guide to termination pay in Ontario covers the full weeks-of-service table.
How PILON is taxed in the UK
Here's the rule that catches people out. HMRC's Employment Income Manual says that from 6 April 2018 some termination payments are taxed as general earnings and no longer benefit from the £30,000 threshold. Employers must work out 'post-employment notice pay' (PENP) using a statutory formula whether the PILON is contractual or non-contractual. In practice, the part of an exit package that stands in for notice is taxed like salary, and only the amount above it can use the £30,000 threshold. Statutory redundancy pay is different: it stays within the threshold.
PILON in Australia, step by step
- Check the minimum notice under the National Employment Standards: 1 week for 1 year or less, 2 weeks for over 1 to 3 years, 3 weeks for over 3 to 5 years, and 4 weeks for over 5 years.
- Add one more week if the employee is over 45 with at least 2 years' continuous service.
- Decide whether they'll work all, part or none of it. Fair Work's example has an employee work 3 days of a week's notice and get the remaining 2 days paid in lieu.
- Pay the full amount they'd have earned, including loadings and penalty rates.
- Check any enterprise agreement, which can set different notice rules.
PILON vs garden leave
Garden leave keeps you employed and paid but tells you to stay away from work, so your contract, including any restrictions, runs to the end of notice. PILON ends the employment immediately. Our guides to garden leave and the wider notice period rules explain the difference.
Want AI doing the heavy lifting in your marketing?
I build the systems that handle the boring 80 percent, so you get your week back. Done properly, with the human kept in.
The verdict
PILON is usually a fair deal for both sides: you're paid, the employer gets a clean break. Check two things before you accept. First, that the amount includes everything you'd have earned, not just basic pay. Second, in the UK, that the tax is being worked out on the PENP basis, so you're not surprised by the deductions on your final payslip.
Frequently asked questions
What is payment in lieu of notice?
A payment covering the notice period when an employer ends your employment immediately instead of having you work your notice.
Can my employer make me take payment in lieu of notice?
In the UK, only if your contract has a PILON clause or you agree to it; otherwise you can work your notice. In Australia, the employer can choose to pay out the notice period.
Is payment in lieu of notice taxable in the UK?
Yes. Since 6 April 2018, the notice element of a termination payment, called post-employment notice pay, is taxed as earnings and doesn't benefit from the £30,000 threshold.
Do I still get holiday pay with payment in lieu of notice?
You should be paid for any holiday you've built up and not taken by your last day. Fair Work notes that employees keep accruing leave for any time they work during the notice period, and Ontario adds vacation pay on top of termination pay.
Is payment in lieu of notice the same as redundancy pay?
No. PILON covers the notice period; redundancy pay is a separate entitlement based on service. In a UK redundancy you can be owed both, and statutory redundancy pay is treated differently for tax.
Does payment in lieu of notice include bonuses?
In Australia, Fair Work says it must include bonuses, loadings, allowances, overtime and penalty rates. In the UK, contractual extras should be included.
