Key Highlights
- PENP is the basic pay you would have earned during an unworked notice period, and it’s subject to income tax.
- Calculating PENP correctly is crucial for determining the tax on your termination payment.
- Post Employment Notice Pay is different from general notice pay, especially regarding tax treatment.
- HMRC provides specific guidance and a formula for an accurate PENP calculation.
- Key factors in the calculation include your basic pay, the length of your notice period, and any contractual payments.
Ending a job can be complicated, especially when final payments and taxes come into play. Many employees are unsure how their notice pay is taxed, while employers worry about getting the numbers right. This confusion often leads to incorrect deductions, delayed payments, or even HMRC compliance issues.
PENP calculation or Post Employment Notice Pay calculation determines how much of your termination payment counts as taxable income when you don’t work your full notice period. Calculating this correctly protects both employers and employees from unnecessary financial or legal problems.
In this guide, we’ll explain what PENP means, how to calculate it accurately, and which payments are included or excluded. By the end, you’ll know exactly how to ensure your notice pay is fair, transparent, and fully compliant.
What is Post-Employment Notice Pay (PENP) in the UK?
Think of it as the basic salary you would have received if you had worked your full employment notice period. It’s a way to ensure that any payment you receive in lieu of notice is taxed correctly.
According to HMRC guidance, Post-Employment Notice Pay (PENP) is a specific calculation required when an employee doesn’t work their full notice period and receives a termination payment.
The law requires employers to determine the amount of basic pay the employee would have earned during the unworked portion of their employment notice period. This calculated amount is the PENP, which is fully taxable. You can find detailed official guidance in HMRC’s Employment Income Manual.
The primary purpose of this rule is to ensure that payments made instead of having an employee work their notice are taxed just like a regular salary.
Before these rules, some termination payments could be paid tax-free, but PENP closed that loophole. It ensures fairness and consistency in how termination payments are handled, making sure the correct tax is paid on what is essentially a form of salary for the notice period.
Why PENP Calculation Matters for Notice Pay?
Accurate PENP calculation is vital because it determines how your termination payment is taxed. It decides how much of your final pay counts as taxable income and how much might qualify for the £30,000 tax exemption.
1. Ensures Correct Tax Treatment
The PENP calculation directly affects how much income tax and National Insurance are deducted from your notice pay. Calculating it correctly ensures that only the appropriate portion of your termination payment is taxed, keeping your payroll fully compliant with HMRC rules.
2. Prevents Costly Payroll Errors
Employers often make mistakes by using the wrong “basic pay” amount, miscounting unworked notice days, or forgetting salary sacrifice adjustments. These errors can lead to incorrect tax deductions and compliance risks, which are easily avoided with a precise calculation.
3. Defines the Tax-Free Portion of Your Payment
Only after completing the PENP calculation can you determine whether any part of your termination award qualifies for the £30,000 tax exemption. This makes PENP the first and most important step in ensuring fair and accurate notice pay taxation.
How to Calculate PENP Step By Step Using The Most Updated Formula?
Getting your PENP calculation right depends on understanding the key factors that affect it and applying the formula correctly. Each detail, from your pay components to contract terms, plays a vital role in determining how much of your notice pay is taxable.
1. Know What Counts as Basic Pay
Your basic pay forms the foundation of every PENP calculation. It’s your salary from the last pay period before notice was given, including:
- Standard gross salary
- Salary sacrifice amounts
- Consolidated allowances
Bonuses, commissions, and benefits are excluded from this figure. Using the wrong base pay is one of the most common errors that lead to incorrect tax deductions.
2. Understand Who Calculates PENP
Employers, typically through their HR or payroll department, are responsible for performing the PENP calculation before processing your final payment. They must ensure that the correct income tax and National Insurance deductions are made.
As an employee, you can request a PENP breakdown to verify how your final pay was determined before signing any settlement agreement.
3. Identify What’s Excluded from the Calculation
Not every payment is included in the PENP formula. HMRC excludes certain items to prevent over-taxation. Excluded payments include:
- Bonuses and commissions
- Travel or temporary responsibility allowances
- Statutory redundancy and holiday pay
These exclusions ensure only relevant earnings are taxed fairly.
4. Review Your Contract and Notice Terms
Your contract heavily influences the calculation. If it contains a Payment in Lieu of Notice (PILON) clause, that payment (T) is deducted since it’s already taxed as income.
Without a PILON clause, your notice payment becomes a “relevant termination award,” and the PENP calculation determines how much of it is taxable. Aligning your contract with HMRC guidance helps avoid costly compliance issues.
5. Gather the Right Information
Before performing the calculation, make sure you have:
- Basic pay (BP) from your last pay period before notice.
- Number of calendar days in that pay period.
- Length of your unworked notice period (D).
- Contractual PILON payment (T), if applicable.
Having these ready ensures accuracy and compliance with the PENP calculation HMRC guidance.
6. Use the Official PENP Formula
Apply the statutory formula:
PENP = (BP × D / P) – T
Where:
- BP = Basic pay from your last pay period before notice
- D = Days in your unworked notice period
- P = Days in your last pay period
- T = Payment in lieu of notice (if applicable)
This formula calculates the taxable portion of your termination payment.
Example:
If your monthly basic pay is £3,000, your unworked notice period is one month, and there’s no PILON, then:
PENP = (£3,000 × 1) – 0 = £3,000
This £3,000 is treated as taxable income. Any remaining part of your termination award may qualify for the £30,000 tax exemption.
7. Double-Check and Keep Records
Small errors, such as miscounting days or using the wrong pay figure, can affect your tax outcome. Always double-check your figures.
Both employers and employees should retain a copy of the PENP calculation for transparency, audit readiness, and dispute resolution.
What Mistakes Do Employers Commonly Make When Working Out PENP?
Even experienced payroll teams can make errors when calculating Post-Employment Notice Pay (PENP). Since this figure determines how much of a termination payment is taxable, even a small mistake can cause compliance issues or lead to under- or overpaid tax.
Here are the most frequent pitfalls employers should avoid:
1. Using the Wrong Basic Pay Figure
Many employers mistakenly use take-home or post-sacrifice pay instead of basic pre-sacrifice pay. HMRC requires using the gross salary before deductions to ensure accuracy.
2. Miscounting the Notice Period
Errors often happen when counting the number of days in the unworked notice period or pay period. Just a one-day miscalculation can distort the final PENP calculation and affect taxable income.
3. Ignoring Salary Sacrifice or Allowances
Failing to include salary sacrifice arrangements or consolidated allowances leads to under-reporting taxable income. Every relevant earning element must be included in the basic pay (BP) used in the formula.
4. Over-Including Payments and Bonuses
Some employers mistakenly include bonuses, commissions, or redundancy payments. These are excluded from the PENP formula and should never inflate the taxable amount.
5. Forgetting to Deduct Contractual PILON
If a Payment in Lieu of Notice (PILON) clause exists in the contract, that amount (T) should be deducted at the end of the formula since it’s already taxed as employment income.
6. Not Keeping Proper Records
A missing or unclear record of the PENP breakdown can trigger audit queries. Employers should always keep a clear calculation sheet and share it with the employee for transparency.
7. Skipping a Compliance Review
Payroll teams sometimes assume the calculation is right without review. Regular checks or using a verified PENP calculator HMRC tool can prevent miscalculations and compliance risks.
Why Choose Direct Payroll Services for PENP and Payroll Compliance?
Handling Post-Employment Notice Pay (PENP) calculations and payroll compliance isn’t just about numbers; it’s about accuracy, accountability, and protecting your business from costly HMRC errors. Whether you manage a small team or oversee large-scale payroll, every detail matters.
That’s where Direct Payroll Services adds real value. Our team combines precision, compliance knowledge, and personal support to make payroll management stress-free and fully compliant.
1. Accuracy You Can Rely On
We apply the exact HMRC PENP calculation formula, verify every figure, and ensure your notice pay and termination payments are taxed correctly, helping you avoid penalties and rework.
2. Full Payroll Compliance
From salary sacrifice schemes to complex notice pay structures, we handle all payroll intricacies in line with the UK General Data Protection Regulation and the Data Protection Act for total compliance confidence.
3. Time-Saving Expertise
Outsource the details that slow you down. Our payroll experts process calculations, deductions, and submissions efficiently so you can focus on running your business, not managing spreadsheets.
4. Transparent Reporting
We believe compliance should be clear, not complicated. Every report includes a detailed breakdown of taxable notice pay, National Insurance contributions, and any termination award adjustments, keeping you audit-ready at all times.
5. Trusted by UK Businesses
From small companies to established enterprises, hundreds of employers across the UK trust Direct Payroll Services for consistent, compliant, and stress-free payroll management.
Get in touch today to simplify payroll and experience complete peace of mind with every calculation.
Conclusion
Getting your PENP calculation right is essential for payroll accuracy and compliance. Applying the official simple formula, including the correct employee’s salary, and accounting for every unworked period of notice, prevents overpayments and tax errors.
Always double-check figures from the employee’s last pay period, review any contractual notice terms, and keep clear records. Consistent reviews and accurate documentation ensure your post-employment notice payment aligns with HMRC guidance and protects both employer and employee.
Frequently Asked Questions
How do I calculate post-employment notice pay (PENP) using the official formula?
For what is a PENP calculation, use this simple formula: (BP × D ÷ P) − T. It calculates the amount of PENP based on the employee’s salary, unworked period of notice, and any contractual notice payments already taxed.
What are the main factors that affect the PENP calculation?
Key factors include the employee’s salary, contractual notice, period of notice, and whether pay is made in equal monthly instalments. The trigger date and last day of employment also influence timing and accuracy.
Can you provide a clear example of a PENP calculation?
Yes. If your employee’s salary is £3,000 per calendar month and you have a one-month unworked period of notice, the amount of PENP equals £3,000 using the whole number of months method.
Are there any recent changes in the PENP calculation rules I should know about?
Since 2021, HMRC has allowed using 30.42 days as the standard when paid in equal monthly instalments, simplifying calculations for the unworked period of notice and ensuring consistent penp tax calculation results.
How is tax applied to payments in lieu of notice (PENP)?
The post employment notice payment is treated as general earnings. It’s fully taxable under PAYE, while certain relevant termination award benefits and statutory redundancy payment may qualify for limited tax exemptions.
What does each part of the PENP formula mean?
Each variable represents part of the employee’s last pay period: BP for basic pay, D for the unworked period of notice, P for pay-period days, and T for contractual notice pay already taxed.
Where can I find official guidance for PENP calculation from HMRC?
HMRC’s Employment Income Manual provides full details, penp calculation examples, and a penp calculation template explaining how to calculate the amount of PENP correctly for every termination of their employment.
Who needs to calculate PENP during employment terminations?
Employers are responsible for the PENP tax calculation before making a final payment, ensuring accuracy for every termination of their employment and proper PAYE deductions.
Is there a difference between PENP and general notice pay?
Yes. PENP is a taxable portion calculated under law, while general notice pay may include other relevant termination award benefits or statutory redundancy payment that aren’t part of the official formula.
Is it possible to do tax-free PILON?
Usually not. Payments made in lieu of notice are part of the post employment notice payment and taxed as general earnings, except where the statutory redundancy payment or exempt relevant termination award benefits apply.
