What is Post-Employment Notice Pay (PENP)?
The government gives this definition:
'PENP represents payments in lieu of notice (PILON), which are not otherwise chargeable to income tax as earnings under section 62 ITEPA 2003. Post-employment notice pay is chargeable to income tax as general earnings and does not benefit from the £30,000 threshold in section 403 ITEPA 2003.'
How to calculate PENP
Treatment of complete months' – the easier formula You can use the simple formula when you have:
- An employee whose pay period is exactly a calendar month;
- Their contractual notice period is expressed in calendar months; and
- The unexpired period of notice is a period of whole calendar months.
The simple statutory formula is BP x D – T
- BP is basic pay (or basic salary) for the last pay period to end before notice is given (assuming notice is given).
- D is the number of months of unexpired notice that the employer was obligated to give.
- T is amounts (other than holiday pay and termination bonuses) that are paid on lawful termination of employment, which have already been subjected to income tax and NIC.
As an example:
Employee A is paid £3,000 monthly (BP). A has a 3 month notice period. A serves one month of the 3 month notice period. This leaves them with an unexpired notice of exactly two months (D). There have been no taxable termination payments already made (T).
A's employer makes a termination award of £10,000.
Applying the formula: BP (£3,000) x D (2) – T (nil) = £6,000 = the PENP £6,000 of the £10,000 termination award is treated as earnings and is taxable.
Caveat: If part of the termination payment is a statutory redundancy payment or an approved redundancy payment under S.157 ERA 1996 that part is not taxable and the termination award is reduced accordingly.
Taking the above scenario, if £5,000 of the £10,000 termination award is a statutory redundancy payment, the termination award will only be £5,000.
As the PENP is greater than the termination award, only the termination award of £5,000 would be treated as earnings.
Treatment of incomplete months' – the complicated formula The more complicated formula is (BPx D) – T P
- BP is basic pay for the last pay period to end before notice is given (assuming notice is given).
- P is the number of calendar days in the pay period.
- D is the number of calendar days of unexpired notice that the employer was obligated to give.
- T is amounts (other than holiday pay and termination bonuses) that are paid on termination which have already been subjected to income tax and NIC.
As an example:
Employee B is paid £1,000 (BP) fortnightly (P). B has a notice period of 8 weeks'. B has served 3 weeks' of their notice period. This leaves them with an unexpired notice period of 35 days (D). B's employer makes a termination payment of £5,000. There have been no taxable termination payments already made (T).
Applying the formula BP (£1,000) / P (14 days) x D (35 days) = £2,500 = the PENP As PENP is less than the termination award, the full £2,500 is treated as earnings and taxable.
Basic Pay is defined as employment income disregarding overtime, bonuses, commissions, gratuities, allowances, termination awards, benefits in kind, amounts treated as earnings, and amounts that count as employment income (such as share-based employment income) and employment-related securities that constitute section 62 earnings.
However, basic pay includes amount that would have been received absent a salary sacrifice arrangement.
Please note this is an example only and was prepared prior to HMRC guidance being issued. Specific advice should be sought in relation to calculations.
Contact us to learn more about PENP
If you want to learn more about the Post-Employment Notice period, how PENP is subject to income tax, National Insurance contributions and salary sacrifice, other exit payments such as PILON, and the PENP tax exemption, we're happy to help.