A PILON calculator has one job: turn the notice period an employee will not work into the correct lump sum. The arithmetic is short. The inputs are where employers go wrong. The wrong notice period, the wrong definition of pay, or a missed cost that surfaces after the money has been paid. 

This article is the method. Three steps, four worked examples, and the costs a headline figure hides. It deals with working the figure out. What a PILON is, when to use one, and the contract clause that decides whether you can pay one safely at all are covered in our guide to PILON payments. 

What a PILON calculator works out 

Any PILON calculation produces two numbers, and most employers only budget the first. 

The first is the gross figure: the pay the employee would have earned across the unworked notice period. The second is the true cost of the exit. That is the gross figure plus employer National Insurance, plus accrued holiday, all processed through payroll like any other earnings. 

To get either number right, a pay in lieu of notice calculator needs three inputs: 

1. The notice period that applies. Contractual or statutory, whichever is longer. 
2. What counts as pay. Basic salary alone, or salary plus benefits, depending on the contract. 
3. The unworked balance. PILON covers the part of the notice period the employee will not work, which is not always all of it. 

Here is the part no generic online tool handles. The second input comes from your contract, not from a lookup table. A PILON clause that limits payment to basic salary produces a different figure from a contract that is silent, and silence carries legal risk of its own. Two businesses paying identical salaries can owe different PILON amounts on identical exits. Run the steps below against the actual contract wording, not against a template. 

Step one: find the notice period that applies 

Start with the contract. Then check the statutory floor. The employee gets whichever is longer. 

The statutory minimums for Great Britain come from section 86 of the Employment Rights Act 1996; Northern Ireland applies the same three bands under the Employment Rights (Northern Ireland) Order 1996. GOV.UK sets them out as three bands: 

1. One month to two years of service: one week. 
2. Two to twelve years: one week for every complete year of service. 
3. Twelve years or more: twelve weeks. The statutory entitlement stops there. 

The comparison runs both ways. A contract promising one month beats the statutory week for someone with eighteen months of service. The statute beats the contract for a ten-year employee on a one-month clause: ten weeks apply, not four. Most PILON figures that come out wrong come out wrong at this step, because the spreadsheet used the clause and nobody checked the floor. 

Price the notice that is in play, not the notice you happen to remember. If you are dismissing, the notice you owe the employee applies. If the employee has resigned and you want them gone sooner, the unexpired part of the notice they gave applies instead. The two periods are often different lengths, and mixing them up changes the figure. 

Fix the start point too. Notice runs from the day after it is given, and the unworked balance runs from the date the exit takes effect, not from the date the conversation first happened. A week of drift between those two dates is a week of pay argued over later. 

In a redundancy the same bands apply, and notice pay sits alongside the statutory redundancy payment rather than inside it. Our guide to redundancy notice and notice pay covers that side in full, and the free redundancy calculator produces the statutory redundancy figure in under a minute. 

Step two: decide what counts as pay 

With a PILON clause, the clause decides. Most well-drafted clauses limit the payment to basic salary for the unworked notice. Some go further and include benefits or their cash value. Whatever the clause says is what the calculation uses. 

Without a clause, the payment stands in for what the employee would have earned had they worked the notice. In principle that covers salary and contractual benefits: a car allowance, private medical cover, employer pension contributions. That is one of the reasons the clause matters. It does not only make the payment lawful, it caps what goes into the sum. 

Pension deserves its own check. Whether a PILON is pensionable depends on the scheme rules and the contract wording, not on any general rule. Check both before you settle the figure, and take advice if the scheme is defined benefit. 

For employees whose earnings vary week to week, GOV.UK bases notice pay on average weekly earnings over the twelve weeks before the notice period starts. Use the same twelve-week average for the PILON. Picking a quiet week, or a busy one, produces a figure that will not survive a challenge. 

Holiday sits outside the calculation entirely. Untaken statutory leave must be paid when employment ends (the right applies to all workers, not only employees), and the PILON does not absorb it. Work the two figures out separately and show them as separate lines in the termination letter. Blurring them is one of the most common causes of underpayment claims after a PILON exit. 

Two smaller wrinkles are worth pinning down before the arithmetic starts. The first is commission and bonus timing. Where the contract is silent and a commission payment would have fallen due during the notice period, the safe assumption is that it belongs in the damages figure, because the employee would have earned it had they worked. A clause that limits PILON to basic salary removes the argument before it starts. The second is the day-rate convention. Contracts differ on what one day of salary means: some divide the annual figure by 260 working days, some by 365, some leave it undefined. On a part-week PILON the convention moves the figure by real money. If your contracts do not name one, that is a drafting gap to close before the next exit, not during it. 

How to calculate PILON: four worked examples 

All four examples are hypothetical and use round numbers so the steps stay visible. Substitute your own contract terms and rates. 

A monthly-paid manager, full notice unworked 

A manager earns £36,000 a year, paid monthly, with four years of service. The contract gives one month's notice and a PILON clause limited to basic salary. The business ends employment with immediate effect. 

1. Notice period: the contractual month. The statutory floor at four years is four weeks, and the month is at least as long, so the contract governs. 
2. Pay definition: basic salary only, per the clause. 
3. Unworked balance: the full month. 
4. Calculation: £36,000 divided by 12. The gross PILON is £3,000. 

A weekly-paid operative on statutory notice 

An operative earns a steady £600 a week and has seven complete years of service. The contract mirrors the statutory minimum. 

1. Notice period: seven complete years falls in the two-to-twelve band, so seven weeks. 
2. Pay definition: the normal weekly wage of £600. If earnings varied, the twelve-week average would replace it. 
3. Unworked balance: all seven weeks. 
4. Calculation: 7 x £600. The gross PILON is £4,200. 

A resignation with an agreed early release 

An administrator on £26,000 resigns with four weeks' notice. After one week the handover is finished, and both sides agree an immediate exit with the balance paid in lieu. 

1. Notice period in play: the four weeks the employee gave. 
2. Pay definition: £26,000 divided by 52, which is £500 a week. 
3. Unworked balance: three weeks. 
4. Calculation: 3 x £500. The gross PILON is £1,500. 

A monthly salary where the statutory floor wins 

A supervisor earns £39,000 a year, paid monthly, with six complete years of service. The contract gives one month's notice. This is the mixed-units case that catches people out: the salary runs in months, the notice runs in weeks. 

1. Notice period: six complete years falls in the two-to-twelve band, so six statutory weeks. The contractual month is shorter, so the statute wins. 
2. Pay definition: convert the salary to a weekly figure. £39,000 divided by 52 is £750 a week. 
3. Unworked balance: all six weeks. 
4. Calculation: 6 x £750. The gross PILON is £4,500. 

Run the same exit on the contractual month and the figure comes out at £3,250. That £1,250 gap is an unlawful shortfall, and it is the single most common error in DIY PILON sums. 

Each result is the gross PILON only. Holiday accrued to the leaving date goes on top. So does employer National Insurance, which is priced two sections down. 

Is the PILON taxable? All of it, every time 

Since 6 April 2018 every PILON is taxed as earnings. Income tax and Class 1 National Insurance come off through payroll, whether or not the contract contains a PILON clause. GOV.UK states the position plainly, and HMRC's manual confirms the rule covers contractual and non-contractual PILONs alike. 

The £30,000 termination payment exemption does not change this. It applies to genuine compensation for losing the job, with statutory and enhanced redundancy pay the usual examples, and only to the first combined £30,000 of those sums. Notice pay never qualifies. Above £30,000, the employer also pays Class 1A National Insurance on the excess. 

The version of this that reaches tribunals and HMRC reviews is the mislabel. A settlement agreement calls a lump sum an ex gratia payment when part of it is really notice pay. The label changes nothing. HMRC looks at what the payment is for, not what the agreement calls it, and the shortfall lands on the employer who ran the payroll, with interest. 

Where an exit involves a settlement package rather than a plain PILON, HMRC requires a separate calculation called Post-Employment Notice Pay, set out at section 402D of ITEPA 2003. PENP decides how much of the whole package is taxed as notice pay, whatever the paperwork says. The formula has its own inputs and its own traps, and it sits outside this walkthrough. For a straightforward PILON of the kind in the examples above, the payroll treatment is the simple version: tax and National Insurance on the lot. 

The costs the headline figure hides 

The gross PILON is the employee's money. The business pays more than that to make the exit happen, and the extra lines are the ones that surprise owners at the payroll run. 

Employer National Insurance comes first. A PILON is earnings, so employer contributions are due on it at 15% for most employees in the 2026 to 2027 tax year. On the £4,200 example above, that is up to £630 on top. Owners budget the £4,200 and meet the £630 later. 

Accrued holiday adds the next line. An employee owed five untaken days does not lose them because the exit came quickly. The days are paid at their normal rate, taxed as normal pay, in addition to the PILON. 

Then there is the cost that does not appear on any payslip. A PILON is the faster exit, not the cheaper one. Garden leave spends similar money over the same weeks, and in exchange the employee stays employed, stays paid, and stays bound by every term of their contract until the end of notice. Which route protects the business better depends on what the leaver could take with them: customer relationships, pricing, a team. That judgement belongs upstream of the arithmetic. 

And one check before any money moves at all. If the contract has no PILON clause, paying in lieu without the employee's agreement is a breach of contract, and the breach can release the employee from their restrictive covenants at the exact moment you most need them held. A correct gross figure does not make the payment safe. The clause question, and what to do if your contracts are missing it, is covered in the PILON payments guide linked at the top of this article. 

Five PILON calculation mistakes 

1. Pricing the wrong notice. The notice you owe when dismissing, the unexpired balance when they resigned. Pick the one in play. 
2. Letting a short clause override the statutory floor. Ten years of service beats a one-month notice clause: ten weeks, not four. 
3. Folding holiday into the PILON. They are separate entitlements, calculated separately and itemised separately. 
4. Treating any part of notice pay as tax free. That route closed on 6 April 2018 and has not reopened. 
5. Budgeting the gross figure only. Employer National Insurance and accrued holiday arrive in the same payroll run, and together they can add 20% or more to the cheque the business writes. 

The figure is the quick part 

Working out a PILON takes ten minutes with the contract in front of you. The exposure sits in everything around the figure: whether the clause exists, whether the covenants survive the exit, whether the letter itemises notice and holiday correctly, and whether the paperwork would stand up if the leaver challenged it. 

Frequently asked questions

How is PILON calculated?

PILON is the pay the employee would have earned over the notice they will not work. You need three inputs from the contract: the notice period that applies, what counts as pay, and the unworked balance. A manager on £36,000 a year with one unworked month and a PILON clause limited to basic salary gets a gross PILON of £3,000.

How many weeks of PILON is an employee owed?

The longer of the contractual notice and the statutory minimum. Statute gives one week for one month to two years of service, one week per complete year from two to twelve years, and twelve weeks after that. A ten-year employee on a one-month clause is owed ten weeks, not four, because the statutory floor wins.

What is included in a PILON payment?

With a PILON clause, the clause decides, and well-drafted clauses usually limit the payment to basic salary for the unworked notice. Without a clause, the payment stands in for what the employee would have earned had they worked the notice, which in principle covers salary and contractual benefits such as a car allowance or private medical cover.

Is holiday pay included in PILON?

No. Untaken statutory holiday must be paid when employment ends, and the PILON does not absorb it. Work out the two figures separately and show them as separate lines in the letter confirming the exit. Accrued days are paid at their normal rate on top of the PILON. Blurring the two is a common cause of underpayment claims.

Is PILON better than garden leave?

Neither is cheaper. A PILON is the faster exit; garden leave spends similar money over the same weeks but keeps the employee employed, paid and bound by every contract term until notice ends. Choose by what the leaver could take: customer relationships, pricing or a team. Without a PILON clause, paying in lieu can release the employee from restrictive covenants.

Does PILON affect redundancy pay?

No. Notice pay sits alongside the statutory redundancy payment, not inside it, so work out each figure separately and itemise both. Paying in lieu does not cut service short either: for statutory redundancy pay, service is counted to the end of the statutory minimum notice. Accrued holiday and employer National Insurance on the PILON are further costs on top.

The free HR Health Check from The HR Doctor takes under a minute and lets you know where your business is solid and where it is exposed, contracts and exit paperwork included. Start it at /HR-Health-Check.