Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
This article was written with the help of AI.
Since 6 April 2018, every termination package paid to a UK employee has had to be split by a statutory formula before a single pound is processed through payroll [1]. The part that represents unworked notice, called post-employment notice pay (PENP), is taxed as ordinary earnings with no £30,000 exemption, while the remainder can still benefit from that threshold [2].
The formula applies whether or not the employment contract contains a payment in lieu of notice (PILON) clause [2]. Before that date, a non-contractual lump sum paid instead of notice could often be treated as compensation and fall inside the £30,000 tax-free amount. The rules were introduced to remove the difference in treatment between contractual and non-contractual notice payments [3].
For payroll teams and bureaux, PENP is one of the few calculations that cannot be read off a payslip. It depends on the notice the employee was entitled to, the date notice was given, the last pay period before that date and every other notice payment already made. A further change to the rules for internationally mobile employees took effect for terminations on or after 6 April 2026 [4].
This guide sets out each term of the formula, the special rules for monthly-paid staff, worked examples, the tax and National Insurance treatment of each slice of a package, and how the payment is reported through Real Time Information.
Key takeaways
- PENP is calculated as ((BP × D) ÷ P) − T, and a negative result means PENP is nil [5].
- PENP is taxed as general earnings and attracts Class 1 National Insurance, with no £30,000 threshold [2] [6].
- Basic pay (BP) excludes overtime, bonus, commission and allowances, and is measured before any salary sacrifice [7].
- Monthly-paid employees use P = 1 for whole-month notice and P = 30.42 otherwise [8].
- Above £30,000, the remaining termination award attracts employer Class 1A National Insurance at 15% [9].
- A payment made after the P45 has been issued is processed on tax code 0T on a week 1 or month 1 basis [10].
Where PENP sits in a termination package
A termination package is rarely a single payment. It usually mixes final salary, accrued holiday, a notice payment, statutory redundancy pay and an additional severance sum, each with a different treatment.
Relevant termination awards
HMRC calls the payments within the scope of the formula "relevant termination awards". To qualify, the payment must be received, and the employment must end, on or after 6 April 2018 [1]. Statutory redundancy pay and approved contractual payments exempt under section 309 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) are excluded from relevant termination awards, although they are still added to the amount tested against the £30,000 threshold [1].
Relevant termination awards are then divided into two elements: PENP, and awards subject to section 403 ITEPA [11]. The section 403 element is found by subtracting PENP from all relevant termination awards, and only that element benefits from the £30,000 threshold [11].
What each slice of a package is
The table below shows how the most common components of an exit are classified. Earnings already taxable under section 62 ITEPA, such as final salary and a contractual PILON, stay outside the formula's output but feed into it through the T term [12] [13].
| Component | Classification | Benefits from the £30,000 threshold |
|---|---|---|
| Final salary and accrued holiday pay | Earnings under section 62 | No |
| Contractual PILON | Earnings under section 62, counted in T | No |
| PENP | General earnings under section 402B | No |
| Statutory redundancy pay | Exempt, but counted towards the threshold | Yes |
| Ex gratia or severance payment above PENP | Section 403 award | Yes |
HMRC states plainly that the £30,000 threshold "does not apply to post-employment notice pay" [13]. The practical effect is that the formula decides how much of a lump sum is ordinary pay, regardless of the label the settlement agreement gives it.
The PENP formula, term by term
The formula sits in section 402D ITEPA and is reproduced in HMRC's Employment Income Manual [14] [5]. It reads ((BP × D) ÷ P) − T. If the result is negative, PENP is nil, and PENP can never exceed the total relevant termination awards [5].
| Term | Meaning | Source of the figure |
|---|---|---|
| BP | Basic pay in the last pay period before the trigger date | Payroll record |
| D | Calendar days in the post-employment notice period | Contract and statutory notice |
| P | Calendar days in the last pay period before the trigger date | Pay frequency |
| T | Other taxable payments in connection with the termination, mainly PILON | Settlement terms |
The trigger date and the notice period
Everything in the formula is anchored to the trigger date. In a notice case, it is the day notice is given; otherwise, it is the last day of employment [15]. The earliest lawful termination date is the last day of a period equal to the minimum notice the employer was required to give, starting at the end of the trigger date [15].
The minimum notice is the longer of the contractual notice and the statutory minimum under section 86 of the Employment Rights Act 1996 [16]. The statutory minimum is one week for employees with between one month and two years of service, one week per complete year from two to twelve years, and twelve weeks after twelve years [17].
| Continuous employment | Statutory minimum notice from the employer |
|---|---|
| One month to under two years | One week |
| Two years to under twelve years | One week per complete year |
| Twelve years or more | Twelve weeks |
Calculating D
D is the number of calendar days from the last day of employment to the earliest lawful termination date [18]. If that date falls on or before the last day of employment, because the notice was fully worked, D is nil [18].
HMRC's examples show the range of outcomes. An employee with 30 days' contractual notice who works 7 of them has a D of 23 days, while an employee summarily dismissed for gross misconduct has a D of nil [19]. A summary dismissal later overturned, for example by a tribunal or by a settlement treating the employee as a good leaver, brings D back to the notice entitlement at the trigger date [18].
Limited-term contracts follow their own rule. Where the contract has no notice requirement, the post-employment notice period runs from the end of the last day of employment to the "limiting event", usually the date the fixed term would have ended [20] [15].
Calculating BP
BP is the employment income received, or which the employee has a right to receive, in the last pay period before the trigger date [7]. It disregards overtime, bonus, commission, gratuities and allowances, as well as amounts received in connection with the termination [7] [14].
Two details catch payroll teams out. First, BP is measured before any salary sacrifice, so an employee who gives up part of salary for pension contributions or a cycle scheme has a BP equal to the pre-sacrifice salary [7]. Second, whether a payment is an "allowance" is a question of fact: a car allowance offered as an alternative to a company car is likely an allowance, while an amount consolidated into standard pay is basic pay [21].
Calculating P
P is the number of calendar days in the last pay period ending before the trigger date, so 7 for a weekly payroll and 14 for a fortnightly one [8]. If no full pay period has ended before the trigger date, P runs from the start of employment to the trigger date; HMRC's example of an employment lasting from 3 November to 25 November with no notice gives a P of 23 days [22].
Monthly payrolls have two simplifications. Where the last pay period is a month, salary is paid in 12 equal instalments and the notice is a whole number of months, P is 1 and D is counted in months [14] [8]. Where the notice is not a whole number of months, P is fixed at 30.42, the result of 365 divided by 12, under an amendment that applies to terminations from 6 April 2021 [8] [3].
| Pay frequency and notice | Value of P | Unit of D |
|---|---|---|
| Weekly | 7 | Days |
| Fortnightly | 14 | Days |
| Monthly, equal instalments, whole months of notice | 1 | Months |
| Monthly, equal instalments, notice not in whole months | 30.42 | Days |
Calculating T
T captures payments or benefits received in connection with the termination that are already taxable as earnings under Chapter 1 of Part 3 ITEPA, which in practice means a contractual PILON or any other PILON taxable under section 62 [12]. Holiday pay accrued before the employment ends, and any bonus payable on termination, are excluded from T [12] [14].
The effect of T is to stop the same notice period being charged twice. Where an employer has already paid the full contractual PILON through payroll, T will often equal or exceed BP × D ÷ P, and PENP is then nil [5].
Worked examples
The examples below apply the formula step by step. The figures are illustrative salaries, not rates, and each result is the share of a package that must be treated as earnings.
HMRC's own example
HMRC's worked example uses an employee on a weekly salary of £2,500 with 6 weeks' statutory notice and 2 weeks' contractual notice, who receives a contractual PILON of £5,000 within a total package of £85,000 [23]. D is 42 days, P is 7 days and T is £5,000, so PENP is ((2,500 × 42) ÷ 7) − 5,000, which gives £10,000 [23].
In the same example, the relevant termination awards come to £45,000 once the £25,000 statutory redundancy payment is set aside. Deducting the £10,000 of PENP leaves £35,000 of section 403 awards; added to the £25,000 statutory redundancy payment, that gives £60,000 tested against the £30,000 threshold, so £30,000 is chargeable as specific employment income in HMRC's figures [23] [11].
Monthly salary, notice in whole months
Take an employee paid a salary of £4,200 a month in 12 equal instalments, with three months' contractual notice, who is dismissed without notice under a settlement paying a single lump sum of £20,000 and no contractual PILON. P is 1, D is 3 and T is nil, so PENP is (4,200 × 3) ÷ 1, or £12,600 [14] [8].
The remaining £7,400 of the lump sum is a section 403 award and falls within the £30,000 threshold [11]. Before 6 April 2018, the whole £20,000 might have been treated as compensation; under the formula, £12,600 of it is ordinary pay [2].
Monthly salary, notice not in whole months
If the same employee were entitled to six weeks' notice instead, D would be 42 days and P would be 30.42 [8]. PENP is (4,200 × 42) ÷ 30.42, which gives £5,798.82 to the nearest penny, and the balance of £14,201.18 is a section 403 award [22] [11].
HMRC's own illustration of the 30.42 rule uses a £3,000 monthly salary and 14 days of unworked notice, giving a PENP of £1,380 [22]. Before the rule, the calendar length of the final month (28, 30 or 31 days) changed the answer, which is the inconsistency the amendment removed [3].
Weekly pay with a partial PILON
An employee paid £600 a week has four weeks' notice. The employer pays a contractual PILON of £1,800 covering three weeks and an additional £5,000 lump sum. D is 28 days, P is 7 and T is £1,800, so PENP is ((600 × 28) ÷ 7) − 1,800, or £600 [5] [12].
Of the £5,000 lump sum, £600 is treated as PENP and £4,400 is a section 403 award inside the £30,000 threshold [11]. GOV.UK gives a similar illustration: an employee on £500 a week with four weeks' notice, receiving £10,000 of statutory redundancy and £5,000 of severance, has £2,000 of that severance treated as notice pay [24].
| Scenario | BP | D | P | T | PENP |
|---|---|---|---|---|---|
| HMRC example, weekly | £2,500 | 42 | 7 | £5,000 | £10,000 |
| Monthly, 3 months' notice | £4,200 | 3 | 1 | £0 | £12,600 |
| Monthly, 6 weeks' notice | £4,200 | 42 | 30.42 | £0 | £5,798.82 |
| Weekly, partial PILON | £600 | 28 | 7 | £1,800 | £600 |
Tax and National Insurance on PENP
Once PENP has been calculated, it is processed through payroll as earnings. The tax and National Insurance treatment of the rest of the package depends on which element it belongs to.
Income tax and Class 1 National Insurance
PENP is chargeable as general earnings, so it is subject to PAYE at the employee's marginal rate [2]. It is also earnings for Class 1 National Insurance: before 6 April 2018, a non-contractual PILON was generally outside Class 1, but from that date the PENP element is within it [6] [25].
For the 2026-27 tax year, the employer pays 15% on earnings above £96 a week for a category A employee, and the employee pays 8% between £242 and £967 a week and 2% above [26]. Because PENP is earnings, the employer's secondary contributions on it are a real cost of the exit, and should be included when an employer budgets a settlement.
Class 1A on awards above £30,000
From 6 April 2020, employers pay Class 1A National Insurance on termination awards above £30,000 that are taxed under section 403 and are not already subject to Class 1 [9]. The rate follows the employer rate, 15% for earnings periods starting on or after 6 April 2025, and employee contributions are unaffected [9].
The charge only applies where the employment ended after 5 April 2020 and the award was paid after that date [27]. Where the amounts tested against the threshold total £45,000, the employer's Class 1A charge is 15% of the £15,000 excess, or £2,250, reported and paid in real time through payroll [9] [24].
| Element | Income tax | Employee Class 1 | Employer charge |
|---|---|---|---|
| PENP | Yes, as earnings | Yes | Class 1 at 15% |
| Section 403 award up to £30,000 | No | No | None |
| Section 403 award above £30,000 | Yes | No | Class 1A at 15% |
| Statutory redundancy pay | Counts towards £30,000 | No | None |
Internationally mobile employees
The formula itself does not change for employees who have worked abroad, but the share of PENP that the UK taxes does. HMRC states that all workdays and earnings are included in the calculation and the full contractual PILON goes into T, even where only part of it is taxable in the UK [28].
Rules up to 5 April 2026
From 6 April 2021, non-resident employees became taxable on PENP "to the extent that their period of notice would have been worked in the UK" [3]. The UK share was the proportion of expected earnings over the notice period that would have been taxable UK earnings under section 27 ITEPA [29].
In HMRC's first example under these rules, a PENP of £9,100 with a UK share of 20% gave a UK amount of £1,820, leaving £7,280 outside UK employment income [29]. The same guidance confirms the pre-April 2021 view that PENP was not earnings for UK duties of a non-resident [29].
Rules from 6 April 2026
For employments terminated, and payments received, on or after 6 April 2026, a new section 38A ITEPA deals with earnings for duties not performed [4]. An employee cannot use section 38A and also claim the foreign service reduction under section 414, and may choose whichever gives the better outcome [4].
HMRC's examples show how much the choice matters. On a £20,000 PENP and a £40,000 section 403 amount, an employee with 7 of 11 years in foreign service has £21,817 taxable in the UK under section 414, compared with £48,000 under section 38A where 40% of the notice duties would have been in the UK [4]. The foreign service reduction itself is only available to employees who are not UK resident for the tax year of termination [28].
Running PENP through payroll and RTI
Most of the errors on PENP happen at the point of processing rather than calculation. The timing of the payment against the P45 decides the tax code and the FPS fields.
Paid in the final pay run
Where PENP is paid with the final salary, it is added to taxable and NIable pay for that period and processed on the employee's current tax code. The leaving date is reported on the Full Payment Submission and a P45 is issued [10]. Employers report the section 403 element above £30,000 separately so that Class 1A can be calculated [9] [24].
Any HMRC-recognised payroll software for SMEs applies the leaving date, final pay and P45 in one run. The question of which P45 details the employee needs, and when, is covered in a separate guide.
Paid after the P45 has been issued
Settlements are often signed weeks after the employee has left. A payment after leaving is processed on tax code 0T on a week 1 or month 1 basis (S0T or C0T for Scottish and Welsh taxpayers), with National Insurance deducted, and reported on the FPS with the original leaving date, the same payroll ID and the "payment after leaving" indicator [10]. No second P45 is issued [10].
The choice of code has a visible effect on the employee's first payment. A PENP of £4,200 paid in a month on 0T has £1,051.66 of income tax, £251.50 of employee National Insurance and £567.45 of employer National Insurance, leaving a net payment of £2,896.84 [30] [26]. The same £4,200 on 1257L for a month would carry £632.06 of income tax and leave £3,316.44, so 0T withholds £419.60 more, which the employee recovers through HMRC's year-end reconciliation or Self Assessment [30].
Correcting a PENP error
A PENP mistake in the current tax year is corrected by updating the year-to-date figures on the next regular FPS [31]. A correction should be sent by the 19th of the tax month after the original FPS, and HMRC only charges a penalty where the employer did not take reasonable care or the error was deliberate [31].
Bureaux running exits for several clients often keep a calculation sheet with the trigger date, minimum notice, BP, D, P and T for each leaver, attached to the settlement file. A multi-client payroll dashboard makes it easier to store those working papers next to the FPS they support.
Common errors and how to avoid them
Most PENP mistakes are the same five errors repeated. The table lists them with the rule each one breaches.
| Error | Correct rule |
|---|---|
| Treating a non-contractual lump sum as wholly within £30,000 | The formula applies to contractual and non-contractual PILON alike [2] |
| Using post-sacrifice salary as BP | BP is measured before salary sacrifice [7] |
| Including a termination bonus or holiday pay in T | Both are excluded from T [12] |
| Using contractual notice shorter than the statutory minimum | The minimum notice is never below section 86 [16] |
| Issuing a second P45 for a payment after leaving | No new P45 is issued [10] |
ACAS guidance adds an employment-law check that sits upstream of the tax calculation: without a PILON clause, an employer cannot force an employee to accept payment in lieu, and doing so can give rise to a breach of contract claim [32]. The broader framework for notice is set out in the guide to the statutory notice period, and the payroll treatment of a contractual payment is covered in the guide to payment in lieu of notice.
For platforms that run exits programmatically, the PENP inputs map neatly onto data already held in an HR system: notice terms, pay frequency and pay elements. A REST API for UK payroll can receive those inputs and return the earnings split before the FPS is built. Where the package also includes redundancy pay, the treatment of that element is covered in the guide on whether redundancy pay is taxable.
Estimate the deductions on a notice payment
Once PENP is known, the Moonworkers UK salary calculator shows the income tax and National Insurance on that amount for any pay period, using the 2026-27 PAYE and National Insurance rules.
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About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category. If in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
PENP converts an employment-law question, how much notice was owed, into a payroll figure. Four inputs drive it: basic pay before sacrifice, the length of unworked notice, the length of the last pay period and the notice payments already made. Getting any of the four wrong moves money between the taxed and untaxed parts of a package, and the employer carries the National Insurance consequence of the error.
The rules have not stood still since 2018. The 30.42 rule for monthly payrolls, Class 1A on awards above £30,000 and the new treatment of internationally mobile leavers from 6 April 2026 have each added a step. Payroll teams that record the formula inputs for every leaver, rather than the final figure alone, are best placed to absorb the next change.
Frequently asked questions
Does post-employment notice pay apply if the employee resigns?
PENP only arises where the employee receives less notice than the employer was required to give, which typically happens on dismissal or redundancy [2]. An employee who resigns and works the full notice has a D of nil, so PENP is nil [18]. If the employer cuts short a resignation notice and pays a lump sum, the formula applies to that payment.
Is PENP the same as payment in lieu of notice?
Not exactly. A PILON is the actual payment made instead of notice, while PENP is the statutory measure of how much of a termination award must be treated as earnings [2]. A contractual PILON is already earnings and is deducted as T, so PENP only adds to taxable pay where the employer pays less as PILON than the notice was worth [12].
Is PENP pensionable?
The tax rules do not decide pensionability, which depends on the rules of the pension scheme and the employment contract. HMRC's formula treats PENP as earnings for income tax and Class 1 National Insurance [2] [6]. GOV.UK notes that a PILON covers basic pay plus contractual extras such as pension contributions where the contract provides for them [17].
What happens to PENP if the employee was dismissed for gross misconduct?
A summary dismissal for gross misconduct gives a D of nil, so no PENP arises [19]. If the dismissal is later overturned, or a settlement treats the employee as a good leaver, D is recalculated from the notice entitlement at the trigger date [18].
