Work out your post-employment notice pay and how much of a settlement is taxable.
What PENP is and why it matters
Post-Employment Notice Pay is the part of a termination payment that HMRC treats as earnings rather than compensation. It exists to stop notice pay being relabelled as a tax-free termination payment. If you leave without working your full notice and receive a settlement, part of that money is almost always PENP, and PENP is taxed as normal pay through PAYE with National Insurance deducted.
How the calculation works
The statutory formula takes your basic pay for the last full pay period before notice, divides it by the number of days in that period, multiplies by the number of unworked notice days, then subtracts any contractual payment in lieu of notice already taxed as earnings. What remains is PENP. Only the balance above PENP can benefit from the £30,000 exemption.
The £30,000 rule people get wrong
The first £30,000 of a genuine termination payment is free of income tax, and that part carries no employee National Insurance. But the exemption applies only to the compensation element, never to PENP. Someone offered £35,000 with £12,000 of PENP does not receive £30,000 tax free — the PENP is taxed in full and only the remaining £23,000 sits inside the exemption.
PENP (Post-Employment Notice Pay) is the part of a termination payment that HMRC treats as fully taxable earnings — it does not benefit from the £30,000 exemption, even in a settlement agreement.
PENP Calculator
Post-Employment Notice Pay · ITEPA 2003 s.402D