What is Post-Employment Notice Pay (PENP)?

Post-Employment Notice Pay (PENP) is a statutory calculation under Section 402D of the Income Tax (Earnings and Pensions) Act 2003. It treats the portion of a termination payment representing unworked notice as taxable general earnings, preventing employers and employees from re-characterizing contractual notice pay as tax-free compensation.

What is the statutory PENP formula?

The statutory formula under ITEPA 2003 s.402D is ((BP x D) / P) - T, where BP is basic pay in the pre-termination pay period, D is the number of unworked days in the post-employment notice period, P is the number of days in the pay period (30.42 days for monthly salaried staff), and T is any contractual payment in lieu of notice already paid and taxed.

Are settlement agreement payments above PENP tax-free?

Yes. Once PENP is carved out and taxed as normal earnings under PAYE and Class 1 NICs, the remaining ex-gratia compensation and statutory redundancy pay qualify for the £30,000 exemption under Section 403 ITEPA 2003. Any balance exceeding £30,000 attracts income tax and employer Class 1A NICs, but is exempt from employee Class 1 NICs.

Does my employer pay for my solicitor to check the PENP clause?

Yes. Under Section 203(3) of the Employment Rights Act 1996, settlement agreements are only legally binding once certified by an independent SRA-regulated solicitor. Employers standardly contribute between £350 and £750 plus VAT directly to your solicitor to cover this advice.

HMRC Statutory Tax Rules • ITEPA 2003 s.402D

Post-Employment Notice Pay (PENP) Calculator

Statutory partitioning of UK settlement payments into 100% taxable notice pay and genuine £30,000 tax-free ex-gratia compensation under HMRC rules.

HMRC Statutory Tax Engine • ITEPA 2003 s.402DEIM12800 Statutory Formula

Post-Employment Notice Pay (PENP) Calculator

Statutory partitioning of termination payments into 100% taxable notice earnings (PENP) versus genuine tax-exempt ex-gratia compensation under Section 403.

Gross Annual Salary (£)

Contractual Notice (months)

Notice Unit

Notice Period Unworked (months)Full notice unworked (standard PILON / immediate exit)

Total Proposed Settlement Offer (£)

Gross total settlement sum offered by employer (including notice and compensation)

Contractual PILON Already Taxed (T) (£)

Enter any contractual notice pay already processed through payroll with PAYE deductions

Statutory Formula Execution:((£5,000 BP × 91 D) / 30.42 P) - £0 T = £15,000

ITEPA 2003 s.402D

1. Taxable PENP (s.402D)£15,000100% Taxable (PAYE & NICs)

2. Tax-Free Ex-Gratia (s.403)£10,0000% Income Tax & 0% NICs

3. Taxable Ex-Gratia Excess£0£0 (Within £30k limit)

4. Est. Net Take-Home£18,700Deductions: ~£6,300

National Insurance & Tax Boundary Analysis:Under Section 402D ITEPA 2003, Post-Employment Notice Pay of £15,000 is treated as general earnings. It attracts employee Class 1 National Insurance and employer Class 1 NICs (15.0% for 2026/27). In contrast, the ex-gratia compensation of £10,000 is exempt under Section 403. Any ex-gratia sums exceeding £30,000 attract employer Class 1A NICs and employee income tax, but are exempt from employee Class 1 NICs.

Independent SRA Solicitor Review • Employer Fee Contribution

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Independent Legal Advice Fee Contribution

For a settlement agreement to legally waive employment tribunal claims, Section 203(3) requires you to receive independent legal advice. Employers standardly provide a capped commercial contribution (typically £350 to £500+ plus VAT) directly to your solicitor upon agreement completion. If negotiations abort or legal work exceeds the agreed cap, liability depends on your solicitor's terms of engagement.

Independent matching serviceCapped employer fee contribution upon completionSRA-regulated solicitors only

How Post-Employment Notice Pay (PENP) Works in the UK

Prior to April 2018, employers and employees could occasionally negotiate settlement agreements where payment in lieu of notice (PILON) was classified as non-taxable compensation if the employment contract lacked a formal PILON clause. Under Finance Act 2017 and Section 402D of the Income Tax (Earnings and Pensions) Act 2003, this practice was eliminated.

The statutory rules treat all unworked notice pay as Post-Employment Notice Pay (PENP). Regardless of how the settlement agreement terms are worded or whether PILON is expressly referenced, HMRC requires the PENP formula to be executed. The resulting PENP figure must be subjected to standard PAYE income tax and employee Class 1 National Insurance before any residual compensation qualifies for the £30,000 tax exemption under Section 403.

Understanding the Statutory PENP Components

1. Basic Pay (BP)Under HMRC Employment Income Manual (EIM12830), BP represents contractual basic salary in the last pay period before notice was given. Discretionary bonuses, performance commissions, overtime, and benefits in kind are strictly excluded.

2. Unworked Notice Days (D)The number of calendar days in the post-employment notice period. For employees leaving immediately with zero notice served, D equals the full notice entitlement. For employees serving partial notice, D is the unworked remainder.

3. Pay Period Days (P)Under Section 402D(5), P is 30.42 days for employees paid by monthly calendar instalments (365 / 12), or 7 days for employees paid weekly, establishing the exact daily rate of pay.

4. Taxable Deductions (T)Under Section 402D(3), T represents any termination payment already subjected to PAYE tax and Class 1 NICs (such as contractual PILON paid through payroll), preventing double taxation.

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