What is Post-Employment Notice Pay? (PENP)

What is PENP?

PENP is a tax calculation used to determine income tax and National Insurance contributions that an employee would have paid during any period of unworked notice where there has not been a payment in lieu of notice (PILON). Any portion of a “relevant termination award” will then be taxed as earnings up to the PENP value. PENP is designed to prevent situations in which settlement agreements are used as vehicles to avoiding tax liabilities.

Essentially, PENP reflects the basic salary the employee would have received had they worked their notice period less any PILON. The effect is ordinarily that some part of the settlement payment will be taxable.

The PENP formula explained

The PENP calculation is as follows:

((BP × D) ÷ P) − T

‘BP’ is the employee’s basic pay in respect of the last pay period of the employment ending before the trigger date (including any salary sacrifice);

‘D’ is the number of calendar days in the post-employment notice period;

‘P’ is the number of calendar days in the employee’s last pay period; and

‘T’ is any payment, or benefit received in connection with the termination of a person’s employment, which is chargeable to income tax.

The following case study demonstrates the calculation in practice:

((BP × D) ÷ P) − T

BP: an employee’s basic pay is £4,000;

D: the calendar days in the notice period are 62 days;

P: the calendar days in the last pay period are 30 days; and

T: £0

The calculation is: ((4,000 x 62) ÷ 30) – 0 = £8266.66

£8266.66 is the amount of the total settlement payment that will be subject to income tax and national insurance contributions. The remainder can then be paid free of tax up of the £30,000 threshold.

What happens if the PENP is nil or negative? 

If the PENP is nil or a negative figure, no additional tax will be due to the termination award.

Why accurate PENP calculation is esstential?

It is important that PENP is calculated correctly, to ensure that the termination payment is properly taxed and thus employers are compliant with tax legislation. Failure to do so may expose the employer to tax liabilities and potentially risk of a tax audit.