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HMRC internal manual

Employment Income Manual

PENP formula: how to calculate ‘T’

EIM13874 explains that, with effect from 6 April 2018, the post-employment notice pay element of all ‘relevant termination awards’ is chargeable to income tax as general earnings. Post-employment notice pay is calculated using the PENP formula (see EIM13880).

EIM12976 explains that some PILONs are chargeable to income tax under section 62 ITEPA 2003. Post-employment notice pay (PENP) brings in to the charge to income tax, as general earnings, payments in lieu of notice (PILON), which are not otherwise chargeable to income tax as earnings under section 62 ITEPA 2003.

The PENP formula reduces the amount of post-employment notice pay by the amount of any PILON received in connection with the termination of a person’s employment which is chargeable to income tax as earnings under section 62 ITEPA 2003. This reduction is given effect by ‘T’ in the formula.

In the PENP formula. ‘T’ represents payments, or benefits received in connection with the termination of the employment, which are chargeable to income tax by a provision other than in Chapter 3 of Part 6 ITEPA 2003.

Primarily ‘T’ is concerned with contractual, or other PILONs, which are already chargeable to income tax under section 62 ITEPA 2003. However, holiday pay and bonuses payable for termination of the employment are specifically excluded from the value of ‘T’ so that the amount of PENP is only reduced by the amount of any taxable PILON.

So ‘T’ is the total amount of any payment or benefit received in connection with the termination which:

a. would fall within section 401(1)(a) ITEPA 2003 but for section 401(3) ITEPA 2003

b. is taxable as earnings under Chapter 1 of Part 3 of ITEPA 2003

c. is not pay in respect of holiday entitlement for a period before the employment ends

d. is not a bonus payable for termination of the employment