This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

National Insurance Manual

Class 1 NICs: earnings of employees and office holders: payments made on termination of employment: amounts taxed a ‘Post Employment Notice Payment’ treated as earnings for Class 1 NICs purposes


NIM02520 explains that as a payment-in-lieu-of-notice (PILON) is a compensatory payment it is not considered to be earnings for NICs purposes. NIM02530 and NIM02550 explain how this position is different for contractual and customary PILONs on which Class 1 NICs is due.

From 6 April 2018 an element of a termination payment paid to an individual who has their employment terminated without notice will now be treated as earnings for NICs purposes. This means that Class 1 NICs will be due on a PILON even if it is not a contractual or customary payment.

With effect from 6 April 2018 new legislation (sections 402A to 402E of the Income Tax Earnings and Pensions Act 2003 (ITEPA)) changed the way that termination payments are taxed. When a termination payment is paid to an individual who leaves their employment without notice then the amount of that payment which represents the earnings they would have received had they actually worked a notice period will now be taxed as general earnings. This taxable amount is called a ‘Post Employment Notice Payment’ (PENP) and is calculated in accordance with the legislation. The PENP calculation takes into account any contractual or customary PILONs on which income tax is already due.

Legislation has been introduced to mirror this position for Class 1 NICs purposes. From 6 April 2018 the amount of PENP that is taxable as general earnings is also treated as earnings for NICs purposes. Class 1 NICs will be due on that same amount.

The NICs legislation is contained in regulation 22(14) of the Social Security (Contributions) Regulations 2001 (as amended by The Social Security (Contributions) (Amendment No. 2) Regulations 2018).

Further details of the tax changes can be found in EIM13784.


Megan enters into a compromise agreement with her employer to leave her employment immediately in return for a payment of £9,000. For tax purposes the ‘Post Employment Notice Payment’ (PENP) is calculated to be £7,500; this being the earnings she would have received had she worked the 3 months notice period to which she was contractually entitled (3 × £2,500 per month). For NICs purposes the amount taxed as a PENP (£7,500) is treated as earnings and Class 1 contributions is due on this. No Class 1 NICs is due on the balance of the total payment (£1,500).