Home Legal Services Employment Settlement Agreements for Employees
Written by:Â Owen John, Employment Law Partner, Darwin Gray | Last updated: 24/10/2026 | Reviewed by: Owen John
Payment in lieu of notice, usually shortened to PILON, is a payment your employer makes instead of requiring you to work your notice period. Rather than you staying on for your four weeks, three months, or whatever your notice is, your employment ends sooner and they pay you a lump sum covering that notice instead. “In lieu” just means “instead of”.
It’s a practical tool. Sometimes neither side wants you working your notice, maybe the relationship has broken down, maybe you’re moving to a competitor, maybe everyone just wants a clean line under it. PILON lets your employment end quickly while still paying you what you’d have earned during notice.
You’ll very often see PILON in settlement agreements, and it’s one of the figures worth checking carefully, both the amount and the tax treatment.
The mechanics are simple. Instead of working out your notice, your employment terminates, often immediately or on a near date, and your employer pays you a sum equal to what you’d have received during the notice period. That usually means your basic pay for the notice, and depending on your contract, it can include the value of benefits you’d have had too (pension contributions, car allowance, and so on).
Whether your employer can do this cleanly depends on your contract. A PILON clause gives them the clear right to pay in lieu rather than require you to work notice. Without one, paying in lieu can get more complicated, and it affects things like whether your restrictive covenants still bite. It’s one of the points we check when reviewing an exit.
Yes, and this catches a lot of people out. PILON is taxable as earnings, with income tax and National Insurance deducted, just like your normal pay.
It used to be possible, in some cases, to pay notice tax-free. That changed. Since April 2018, all payments in lieu of notice are treated as earnings and taxed in full, whether or not your contract has a PILON clause. There’s a specific calculation (known as “post-employment notice pay”, or PENP) that works out how much of a termination package counts as taxable notice.
The practical takeaway: PILON does NOT get the £30,000 tax-free treatment that a genuine ex gratia payment can. If a settlement agreement tries to dress up notice pay as tax-free compensation, HMRC can challenge it, and you could be left with the bill. Making sure notice is correctly separated from tax-free compensation is central to getting your settlement agreement tax right.
Both get you out of the workplace, but they’re opposites in one key way:
The difference affects your tax, when you’re free to take a new job, and when your restrictive covenants start running. With PILON, your employment ends sooner, so the clock on post-termination restrictions usually starts earlier. With garden leave, you stay tied in longer. Which is better for you depends on your plans, and it’s worth taking advice before agreeing to either in a settlement.
Because PILON is often a big part of a settlement payment, two things are worth checking: that the amount genuinely reflects your full notice entitlement (including benefits where your contract provides for them), and that it’s been taxed correctly rather than wrongly lumped in with the tax-free element. Both are easy to get wrong, and both can cost you. We check them as a matter of course.
It means your employer pays you a lump sum instead of making you work your notice period. Your employment ends sooner, often straight away, and you receive the pay you’d have earned during notice. “In lieu” means “instead of”. It’s common where neither side wants you working your notice, and it frequently appears in settlement agreements. The key things to check are that the amount is right and that it’s been taxed correctly.
Yes. Since April 2018, all PILON is taxed as earnings, with income tax and National Insurance deducted, whether or not your contract contains a PILON clause. It doesn’t qualify for the £30,000 tax-free treatment that a genuine ex gratia compensation payment can. If a settlement agreement tries to treat notice pay as tax-free, HMRC can challenge it, so it’s important the notice element is correctly identified and taxed.
With PILON, your employment ends immediately and you’re paid a lump sum for your notice. With garden leave, you stay employed throughout your notice on full pay, but you don’t attend work. The difference affects your tax, when you can start a new job, and when any restrictive covenants begin to run. PILON usually frees you up sooner. Which suits you better depends on your situation, so it’s worth advice before agreeing to either.
It depends on your contract and the circumstances. If you’re dismissed with notice and required to work it, there’s no PILON, you work the notice. If you’re dismissed without being required to work notice, you should normally receive pay in lieu, unless you were dismissed for gross misconduct, where notice pay may not be due at all. If you’re unsure whether you’ve been paid the right notice, it’s worth getting it checked.
If PILON is part of your settlement, we’ll check it’s been calculated and taxed correctly, and that you’re not losing out. We’re Darwin Gray, one of Wales’ leading employment law firms, advising on hundreds of settlement agreements every year. You’ll deal directly with your solicitor, and as the only firm in Wales offering full Welsh language employment advice at every level, we can help in Welsh or English.
Get a free, no obligation chat with our employment team. Call 02920 829 100 or use our contact form.
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Settlement agreements for employees
Disclaimer: This guide is general information, not legal or tax advice, and the rules change. For advice on your situation, please speak to a qualified employment solicitor.
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