Garden leave: pay, tax and payroll rules for employers

An employee on garden leave stays on the payroll and must be paid as usual, including contractual benefits, for the whole notice period ^{[1] [2]}. Every pound of that pay is still earnings for income tax and Class 1 National Insurance, with employer contributions charged at 15% above the £5,000 Secondary Threshold for the 2026-27 tax year ^{[3] [13]}.

Garden leave (sometimes called gardening leave) is the arrangement under which an employer tells an employee not to come into work, or to work only from home or another location, for part or all of a notice period ^[1]. It is most common when a senior employee resigns to join a competitor or when a role is made redundant, and the employer wants to keep that person away from clients, colleagues and confidential information until the contract ends ^[2].

For payroll, garden leave is deceptively simple. Nothing about the employment changes until the final day of notice, so the payroll runs exactly as before. The complications sit at the edges: deciding whether a payment is garden leave pay or a payment in lieu of notice, handling holiday, sickness and pension contributions during the period, setting the correct leaving date on the Full Payment Submission, and dealing with any lump sum if the arrangement ends early.

This article sets out what garden leave is in law, what the employer must pay, how PAYE and National Insurance apply, how it differs from pay in lieu of notice and post-employment notice pay, the payroll steps from the first day to the P45, and the policy debate that may reshape notice-period practice.

Key takeaways

• An employee on garden leave remains employed and must receive normal pay and contractual benefits throughout the notice period ^{[1] [2]}.
• HMRC treats garden leave pay as ordinary earnings, liable to PAYE and Class 1 National Insurance in the normal way, not as a payment in lieu of notice ^[3].
• The leaving date reported to HMRC is the last day of the notice period, not the last day the employee attended work, so the P45 is issued at the end of garden leave ^{[8] [15]}.
• If garden leave is cut short with a lump sum, the post-employment notice pay (PENP) rules may treat part of that sum as fully taxable earnings, outside the £30,000 termination-payment exemption ^{[4] [5]}.
• Statutory holiday keeps accruing during garden leave, and an employer that wants the employee to use it must give notice at least twice as long as the leave to be taken ^{[7] [17]}.

What garden leave is and why employers use it

Garden leave is a period during which an employee is still employed but is instructed not to work. GOV.UK describes it as an employer asking a worker "not to come into work, or to work at home or another location" during the notice period ^[1]. ACAS adds that the employer can apply it to part or all of the notice period, and that the usual reason is to stop the employee accessing sensitive or confidential information before they leave ^[2].

The key legal point is that the contract continues. ACAS states plainly that "the employee is still employed during garden leave, even though they're not working" ^[2]. That single fact drives every payroll consequence that follows: the employee remains on the payroll record, remains subject to PAYE and National Insurance, and remains bound by contractual duties such as confidentiality and the duty not to work for anyone else.

The commercial reasons behind garden leave

Garden leave is a protective tool. An employer facing the departure of a salesperson, an account director or an engineer with access to product roadmaps can use the notice period as a buffer, so that by the time the person starts elsewhere their knowledge of pipelines and prices is weeks or months out of date ^[2]. It also gives the employer time to introduce a successor to clients without the outgoing employee in the room.

The Department for Business and Trade has noted that some employers use garden leave as an alternative to non-compete clauses, because the worker continues to be paid while being kept out of the market ^[9]. The same paper estimates that around 5 million employees in Great Britain work under contracts containing a non-compete clause, with a typical duration of about six months ^[9]. Garden leave and post-termination restrictions are often drafted to work together, which is why the policy debate covered later in this article matters to payroll as well as to HR.

Does the contract need a garden leave clause?

An express garden leave clause is the safest foundation. It allows the employer to place the employee on garden leave during notice and usually sets out what the employee may and may not do in that period. GOV.UK guidance on handing in notice treats garden leave as something the employer "may ask", and lists the employment contract as the first place to check ^[1].

Without a clause, an employer that keeps paying the employee in full may still be able to tell them to stay at home, but the position is less certain for roles where the employee has a recognised interest in actually working (for example to maintain professional skills). Because this is a contractual question rather than a payroll one, the employer's employment lawyer or HR adviser should confirm the position before the payroll team is instructed. ACAS recommends that employers keep the employee informed of what is expected during the period, since the employee remains bound by their contract throughout ^[2].

What an employer must pay during garden leave

The payment obligation is straightforward: garden leave is paid leave. GOV.UK states that the employee will "get the same pay and contractual benefits" ^[1], and ACAS confirms that "the employee must get paid as usual during their notice period, including for any work benefits in their contract" ^[2].

The table below sets out the elements a payroll team should expect to keep running through garden leave.

The safest assumption for payroll is that the employee should be no worse off than if they had worked the notice period, unless the contract clearly says otherwise. An SME payroll platform that holds pay elements as separate, dated components makes it easy to keep salary and benefits running while switching off variable items such as overtime.

How long garden leave can last

Garden leave can only run for as long as the notice period. The statutory minimum notice an employer must give is set by length of service, and the contract can provide more but never less ^[6].

In practice, garden leave is most often used with longer contractual notice periods of three, six or even twelve months, which are common in senior and client-facing roles. Notice pay for statutory purposes is based on average weekly earnings over the 12 weeks before notice starts, a figure payroll may need to produce when notice pay is disputed ^[6].

What garden leave costs the employer

Because pay and National Insurance continue in full, garden leave is an expensive form of protection. The worked example below uses an employee on a £60,000 salary (£5,000 a month), standard tax code 1257L, on three months' garden leave, using the 2026-27 thresholds and rates ^{[13] [14]}.

Over three months, the employer pays £17,062.35 in salary and employer National Insurance for a person who does no work, before pension contributions and benefits are added ^[13]. That cost is the commercial price of protecting client relationships and confidential information, and it is the reason employers weigh garden leave against the alternatives described below.

How PAYE and National Insurance apply to garden leave pay

HMRC's position is unambiguous. In its National Insurance Manual, HMRC describes garden leave as the employer giving contractual notice, paying the earnings the employee would have received for working the period, and telling the employee not to attend work ^[3]. It then states that "such a payment is earnings for the purposes of NICs and is liable for Class 1 NICs in the normal way" ^[3].

Garden leave pay is not a PILON

The same manual page makes an important distinction. Because the contract does not end until the notice period expires, there is no breach of contract and no compensation is due, so "the employer is not actually making payment of a PILON in these circumstances" ^[3]. Garden leave pay is ordinary contractual earnings, taxed through PAYE with the employee's usual tax code and basis ^[14].

This is true even if the employer chooses to pay the whole notice period in one lump sum at the start of garden leave. HMRC's description explicitly covers a lump-sum payment of the earnings for the period ^[3]. A lump sum will, however, distort the cumulative tax calculation in the month it is paid and can push a basic-rate employee temporarily into higher-rate deductions, so most employers simply continue the normal monthly payroll ^[14].

Thresholds and rates that apply

Garden leave pay is processed through the same calculation as any other payroll period. The National Insurance thresholds for the 2026-27 tax year are set out below ^[13].

Employees pay 8% between the Primary Threshold and the Upper Earnings Limit and 2% above it, while employers pay 15% above the Secondary Threshold ^[13]. Reliefs such as the zero employer rate for under-21s continue to apply during garden leave because the category letter does not change ^[13]. The background is set out in the guide to employer National Insurance.

Garden leave versus pay in lieu of notice

Garden leave and pay in lieu of notice (PILON) achieve a similar goal, keeping a departing employee out of the business, but they are legally and fiscally different. Under PILON the employment ends immediately and the employer pays a sum instead of notice; under garden leave the employment continues to the end of notice ^{[2] [6]}.

The practical trade-off is control against cost. Garden leave keeps the employee bound by their duty of loyalty and prevents them starting a new job, but it costs the full notice period including benefits. PILON ends the relationship cleanly, but the employee is free to work for a competitor immediately, subject only to any enforceable restrictive covenants.

Post-employment notice pay when garden leave ends early

The two arrangements collide when garden leave is cut short. A common scenario is an employee who agrees to leave part-way through garden leave in return for a lump sum. Because employment ends before the full notice has run, the PENP rules may apply ^[4].

HMRC's manual explains that PENP arises where an employee receives no notice or less notice than they are entitled to, and that from 6 April 2018 it is "chargeable to income tax as general earnings" and sits outside the £30,000 termination-payment threshold ^[4]. Employers must apply the PENP calculation whether the payment is contractual or not ^[4]. Since 6 April 2020, payments in lieu of notice are also treated as earnings for Class 1 National Insurance, mirroring the tax treatment ^[11].

Working through the PENP formula

The PENP formula is ((BP × D) ÷ P) − T ^[5]. BP is the basic pay for the last pay period before the trigger date, D is the number of calendar days in the unexpired notice period, and P is the number of calendar days in that last pay period ^[5]. T is any amount in the package already taxed as earnings, excluding holiday pay for a period before employment ends and termination bonuses ^[18].

Taking the £5,000-a-month employee above, suppose they leave after one month of a three-month garden leave and are paid a single non-contractual lump sum of £25,000. With a last pay period of 30 days and 61 days of notice left, PENP is (£5,000 × 61) ÷ 30, or £10,166.67, and T is nil ^{[5] [18]}. That £10,166.67 is taxed as earnings with Class 1 National Insurance, and only the remaining £14,833.33 can benefit from the £30,000 exemption ^{[4] [11]}. Any termination award above £30,000 also attracts employer Class 1A National Insurance, reported and paid through RTI ^{[12] [11]}.

The interaction with redundancy payments is covered in detail in the guides to statutory redundancy pay and whether redundancy pay is taxable.

Holiday, sickness and pension during garden leave

Because the employee remains employed, the ordinary statutory rights continue to operate during garden leave. This is where payroll errors most often arise, since the employee is not at work and line managers stop recording absences.

Holiday accrual and forced leave

Statutory holiday continues to build up for as long as employment lasts, which includes every day of garden leave ^[17]. Any statutory holiday that remains untaken when employment ends must be paid in the final pay ^{[8] [17]}.

Many employers prefer the employee to use accrued holiday during garden leave so that no large balance is paid out at the end. GOV.UK guidance confirms that employers can tell staff to take leave at set times, but the notice must be "at least twice as long as the leave they want their staff to take", so ten days of required holiday needs at least twenty days' notice ^[7]. Some contracts include an express clause allowing the employer to require holiday during garden leave, which simplifies the position ^[7]. For employees on variable hours, the calculation should follow the 52-week holiday pay average.

Sickness during garden leave

An employee who falls ill during garden leave remains an employee for Statutory Sick Pay purposes. Since 6 April 2026, SSP is payable from the first day of sickness and is no longer limited to employees earning above the Lower Earnings Limit, at £123.25 a week or 80% of average weekly earnings if lower ^[16]. In practice, an employee on full contractual garden leave pay already receives more than SSP, and SSP can usually be offset against contractual pay rather than paid on top ^[16]. The absence should still be recorded, since it can affect SSP linking periods and the employer's records ^[16].

Pension contributions

Workplace pension contributions continue throughout garden leave because the employee remains in employment and continues to receive pay. GOV.UK notes that even where an employee receives pay in lieu of notice, contractual extras such as pension contributions form part of what is due ^[6]. For garden leave, where the employment is ongoing, the normal auto-enrolment deductions and employer contributions should simply continue on each payroll run until the leaving date.

Payroll steps from first day to P45

A clean garden leave process in payroll is mostly about dates. The table below summarises the checkpoints.

Reporting the leaving date through RTI

The leaving date reported to HMRC is the date the contract ends, which for garden leave is the last day of notice. GOV.UK instructs employers to "put their leaving date on their payroll record when you last pay them" and to make deductions as normal on the next Full Payment Submission ^[8]. Reporting the last day in the office instead would end the employment early in HMRC's records, trigger a premature P45 and could cause the remaining garden leave pay to be taxed as a payment after leaving ^{[8] [15]}.

Payroll software that holds the HMRC Recognised status submits the FPS with the correct leaving date and year-to-date figures automatically. For a bureau running many client schemes, a multi-client payroll dashboard that flags employees with a future leaving date helps avoid the classic mistake of processing a leaver too early.

Payments after the P45

GOV.UK states that the employer must give the employee a P45 when they leave and must not issue another one for a later payment ^[8]. If a bonus, commission or other sum is paid after the P45, it is taxed using code 0T on a Week 1 or Month 1 basis (S0T or C0T for Scottish and Welsh taxpayers), with National Insurance and student loan deductions made as normal, and reported on the next FPS with the "payment after leaving" indicator ^[8].

The policy debate around notice periods and garden leave

Garden leave sits inside a wider debate about restrictive practices in employment contracts. In November 2025, the government published a working paper on options for reforming non-compete clauses, including a statutory cap on their length, limits that vary by company size, a ban below a salary threshold, and an outright ban ^[9]. The paper notes that 71% of non-compete clauses reported in polling exceed three months ^[9].

Why garden leave is part of the conversation

In October 2026, the government signalled that it intends to legislate on non-competes, following criticism from start-up founders that non-competes, long notice periods and garden leave were holding back hiring ^[10]. No cap or timetable has been announced, and any change requires primary legislation ^[10]. If non-competes are restricted, employers may lean more heavily on garden leave as the remaining lawful way to keep departing staff out of the market, and the working paper itself recognises garden leave as an alternative ^[9].

For payroll, any shift towards longer garden leave means more employees paid for extended periods without working, more leaving dates set months into the future, and more early-exit settlements that trigger PENP. Platforms that embed UK payroll through an HMRC-recognised payroll API can model notice dates, future leaving dates and PENP calculations as data rather than manual workarounds.

Check the cost of final holiday pay

Untaken holiday is often the largest variable in the final pay of an employee leaving after garden leave. The Moonworkers holiday pay calculator works out the value of accrued leave using the statutory rules, so the employer can see the figure before the final payroll run.

Conclusion

Garden leave is, at heart, an ordinary payroll period with an unusual instruction attached. The employee stays employed, pay and benefits continue, and HMRC taxes the pay as normal earnings with full Class 1 National Insurance. The difficulty lies in the boundaries: the leaving date that must match the end of notice, the holiday that keeps accruing, and the lump sums that convert part of a settlement into fully taxable post-employment notice pay.

Those boundaries are likely to matter more, not less. With non-compete reform back on the legislative agenda, garden leave may become the main tool employers use to protect confidential information, and payroll systems will need to handle long notice periods, future-dated leavers and PENP calculations as routine rather than exceptional cases.

Frequently asked questions

Is garden leave pay taxed differently from normal salary?

No. HMRC treats garden leave pay as ordinary earnings, so it is taxed through PAYE using the employee's normal tax code and is liable to Class 1 National Insurance in the usual way ^[3]. It is not a payment in lieu of notice, because the contract continues until the notice period ends.

Can an employee on garden leave start a new job?

Generally not. The employee remains employed during garden leave and continues to owe their employer contractual duties, which normally include not working for anyone else without permission ^[2]. The employer can agree to release the employee early, which ends the employment and may bring the post-employment notice pay rules into play if a lump sum is paid.

Does holiday build up during garden leave?

Yes. Statutory holiday continues to accrue for as long as the employment lasts, and any untaken statutory holiday must be paid when employment ends ^[17]. An employer can require the employee to take holiday during garden leave, but must give notice at least twice as long as the leave to be taken ^[7].

When should the P45 be issued after garden leave?

The P45 is issued when employment ends, which for garden leave is the last day of the notice period, not the last day the employee was in the office ^[15]. The leaving date is reported on the Full Payment Submission for the final pay run, and any later payment is taxed with code 0T on a Week 1 or Month 1 basis ^[8].