Birketts' Employment and Tax specialists answer your questions regarding PENP.
What is PENP?
Post-employment notice pay (PENP) is the amount of a ‘relevant termination award’ paid to a departing employee that represents a payment in lieu of all or part of their notice entitlement.
PENP is calculated according to the individual’s basic pay and any period of unserved notice (known as the ‘post employment notice period’). This amount is then subject to deductions for income tax and National Insurance contributions.
The requirement to tax post-employment notice pay means that payments in lieu of notice can no longer be paid free of tax.
What is a ‘relevant termination award’?
A ‘relevant termination award’ (RTA) is a payment or benefit received (directly or indirectly) in connection with the termination of a person's employment, but which is not otherwise subject to tax.
RTAs comprise two elements:
- Post-Employment Notice Pay (PENP)
- Termination payments subject to section 403 ITEPA 2003 (which benefit from a £30,000 tax-free amount, in excess of which they are taxable as employment income).
RTAs do not include a statutory redundancy payment, or approved contractual payment to the extent that they are exempt from tax.
How is PENP calculated?
Post-employment notice pay (PENP) is calculated according to a statutory formula, based on the employee’s basic pay and the number of days (or months) in the individual’s period of unserved notice (the post-employment notice period).
This is the statutory formula:
‘BP’ = the employee’s basic pay in respect of the last pay period of the employment ending before the trigger date
‘D’ = the number of calendar days in the post-employment notice period
‘P’ = the number of calendar days in the employee’s last pay period
‘T’ = any payment or benefit received by the employee in connection with the termination that is taxable as earnings. There are important exceptions to what is included within ‘T’
Note, the formula is slightly different for employees with a monthly pay period and monthly notice entitlement.
If the sum is negative then the amount of PENP will be nil.
If the sum exceeds the total amount of the relevant termination award then post-employment notice pay is capped at the total amount of the relevant termination award.
Our PENP calculator can assist in the calculation of post-employment notice pay for tax purposes.
What is the ‘post employment notice period’?
The post employment notice period for the purposes of calculating the PENP figure is the period beginning at the end of the last day of employment and ending with the earliest lawful termination date.
What is the ‘earliest lawful termination date’?
The earliest lawful termination date for the purposes of calculating PENP is the last day of the period equal in length to the minimum statutory or contractual notice period required to be given by the employer to terminate the employee’s employment, starting with the ‘trigger date’.
What is the ‘trigger date’?
If notice is given to terminate an individual’s employment (by either employee or employer), the trigger date is the day that notice is given. If notice is not given, the trigger date is the last day of the employment.
What is basic pay for the purposes of calculating PENP?
Basic pay is the total employment income the employee receives (or was entitled to receive) in their last pay period before the ‘trigger date’ (either the day notice was given, or the last day of employment if no notice is given), but does not include:
- any amount received by way of overtime, bonus, commission, gratuity or allowance;
- any amount received in connection with the termination of the employment;
- any amount treated as earnings under the benefits code (most benefits in kind);
- any amount which is treated as earnings;
- any amount which relates to securities and securities options and counts as employment income; and
- any employment-related securities that constitute earnings.