PENP

PENP (“Post Employment Notice Pay)

What is post-employment notice pay (“PENP)”

Where an employee is not working their full notice period, PENP is the amount of income the employee would have received during any period of unworked notice. It is essentially a different type of PILON, and is designed to ensure that income tax and NICs are paid on all payments in lieu of notice. It is vital for calculating the amount of income tax and NICs due on any payments made to employees under settlement agreements.

PENP is calculated using a special statutory formula, which may result in PENP being higher than any PILON the employer has calculated. If this is the case, then it is safer to treat the higher figure (usually PENP) as the correct one for income tax and NIC purposes. If an employee works their full notice period then income tax and NICs will be calculated in the usual way and there is no need to calculate PENP.

The employee’s salary, for PENP purposes, is the income the employee would have received during the unworked period of notice, including any amounts given up by the employee as salary sacrifice (i.e. it is the pre-salary sacrifice salary that is used).

Salary sacrifice arrangements in this context means any arrangement whereby the employee gives up part of their cash pay in return for something else. Common salary sacrifice arrangements are:

• Childcare vouchers
• Company cars
• Health insurance
• Work related training
• Car parking near the workplace
• Health screening checks
• Mobiles phones, computers and other technology
• Gym membership
• Accommodation
• School fees

The following are excluded from basic pay for PENP purposes:

• Allowances
• Awards
• Benefits
• Bonuses
• Commission
• Share options

 

How PENP is calculated?

First, the employer has to calculate PENP.

The PENP is the amount of basic pay that an employee would have earned for the notice period to which they were entitled, less any period of notice worked. For example, if their notice period is three months, their monthly pay £4,000, and they worked one month of the notice period before leaving, their PENP will be £8,000.

The legislation contains two formulae for calculating the PENP:

The simple formula

You can use the simple formula when:

 

• Employee’s pay period is exactly a calendar month;
• Notice period is a whole number of calendar months; and
• The unexpired period of notice is a period of whole calendar months.

 

To calculate PENP under the simple formula:

 

-Multiply the gross monthly salary (including any salary sacrifice arrangements) by the number of months’ notice the employer must give; then

 

-Subtract the amount paid on termination (excluding holiday pay and bonuses) which have already had income tax and NIC applied (e.g. any contractual PILON payment to be made).

 

The resulting figure is PENP. If PENP is zero or a minus number then no additional tax will be due.

 

A more complex formula for all other cases

You would use the more complex formula where the notice period is a number of weeks, rather than months, or they are working part of their notice period.

PENP is calculated under the more complex formula as follows:

 

-work out the basic pay for the last pay period to end before notice is given (if the employee is paid monthly, this will be gross monthly salary, if weekly, then gross weekly salary including any salary sacrifice arrangements)

 

-multiply the basic pay figure by the number of days of unworked notice (of the notice period that the employer is required to give the employee).

 

-divide the resulting figure by the number of calendar days in the pay period (if the employee is paid monthly then this will be 28, 30 or 31 days, if paid weekly then it will be 7).

 

-subtract the amount paid on termination (excluding holiday pay, bonuses and consideration for restrictive covenants) which have already had income tax and NICs applied (e.g. any contractual PILON payment to be made).

 

The resulting figure is PENP. If PENP is zero or a minus number then no additional tax will be due.

 What happens if after the calculation, PENP is a positive number?

If PENP is a positive number, then PENP must be subtracted from any ‘relevant termination award’.

• The relevant termination award (‘RTA’) is any payment or benefit which compensates the individual for the termination of their employment (i.e. any ex-gratia which qualifies for the £30,000 tax exemption, excluding any statutory redundancy pay). For example, if an employee is getting £3000 in statutory redundancy pay, and £4000 ex-gratia, then the RTA would be £4000. As above, holiday pay, bonuses and payment for restrictive covenants are not included in the RTA because they are separately taxable as earnings.

 

• Any tax-free element of the RTA will be reduced by the amount of PENP.

 

• If PENP is more than the RTA, income tax and NICs must be paid on the full RTA.

 

• If PENP is less than the RTA, then only PENP will be taxable as earnings – the remainder will be subject to the usual tax rules upon termination (i.e. the first £30,000 can be paid tax free).

 

When is PENP likely to be zero?

PENP is likely to be zero in the following situations:

Scenario A

 

• there is a contractual PILON based on a number of whole months;
• there is no salary sacrifice arrangement in place (or PILON is calculated on the basis of pre-salary sacrifice salary);
• ·no standard cash allowances are paid (or PILON is calculated taking those allowances into account); and
• the unworked period of notice is in a number of whole months.

 

Scenario B

 

• there is a contractual PILON based on a number of weeks;
• there is no salary sacrifice arrangement in place (or PILON is calculated on the basis of pre salary pre salary sacrifice salary);
• no standard cash allowances are paid (or PILON is calculated taking those allowances into account); and
• the relevant pay period has 31 days.

EXAMPLES

 

Usually, it would be HR or your employer’s payroll who would calculate PENP, as only they would have the information required to do so. However, the calculations below may help put the formula into context, illustrate how different factors can change the outcome, and help to flag up any particularly odd looking PENP calculations from HR.

Example employee 1 (the easy one):

Use this if:

Contractual notice period is expressed whole months
final pay period pre-notice is one month, and
no notice has been worked.
The calculation is:

 

(BP x D) – T

 

BP (basic pay, including salary sacrifice) = £3000 p/m
D (unworked notice period) = one month
T (contractual payments made excluding holiday or termination bonuses, including contractual PILON) = £0
PENP = 3000 x 1 = £3,000

 

This amount will need to be taxed from any compensation payment made.

 

Alternatives:

 

If, for example, the employee was being paid a contractual PILON (to be taxed in the usual way), then T would be £3,000 (representing one month’s PILON), meaning that PENP would be zero.
If the PILON payment due under the employee’s contract does not include salary sacrifice, then T will be less than BP, and the difference will be taxable (from the ex-gratia). This would look as follows:
Basic pay for the purposes of PENP is £3,000 which includes £300 salary sacrifice (BP).
D is one month
The employee’s contract states that salary sacrifice is not included in PILON payments, so only £2,700 contractual PILON is being paid.
Therefore: (3,000 (BP) x 1) – 2,700 = 300. Income tax and NICs will need to be paid on £300 of any ex gratia sum.

Example employee 2:

This would be used where some notice has been worked.

 

((BP x D) ÷ P) – T

 

BP =£3,000 per calendar month (incl. any salary sacrifice)
Notice period is 3 months (92 days) and the period of notice worked is 17 days
D (unworked notice period) = 92 – 17 = 75 days
P (pay period) = one month – notice is given in June so the pay period immediately beforehand is May, which has 31 days
T (contractual payments including PILON) = £0
((3000 X 75) ÷ 31) – 0 = £7,258.06

 

PENP = £7,258.06

This amount must be taxed from any compensation payment

Alternatives:

If, for example, the employee was being paid a contractual PILON (to be taxed in the usual way) on the remainder of the notice, then:
BP is £,3000
D is 75 days
P is 31 days
T would be £7,336.95 (representing 75 days PILON).
PENP = ((3,000 x 75) ÷ 31) – 7,336.95 = -78.88.

 

PENP is a negative figure, meaning PENP is nil, and no income tax or NICs will be payable on any ex-gratia sum.

If the PILON payment due under the employee’s contract does not include salary sacrifice. This would look as follows:
Basic pay for the purposes of PENP is £3,000 which includes £300 salary sacrifice (BP).
D is 75 days
P is 31 days
The employee’s contract states that salary sacrifice is not included in PILON payments. So, PILON on the remaining 75 days of notice (T) will be ((2,700 x 3) ÷ 92) x 75 = £6,603.26
PENP is  ((3000 x 75) ÷ 31) – 6,603.26 = £654.80

Income tax and NICs will need to be paid on £654.80 of any ex gratia sum.

 

Example employee 3:

Where the employee is paid monthly, but notice period expressed in weeks AND PILON has been paid on a taxable basis.

 

((BP x D) ÷ P) – T

 

BP = £10,000 p/m (including £1,000 salary sacrifice)
Period of notice worked = 0
D (unworked notice) = 12 weeks (84 days)
P (pay period) = one month (30 days) (notice served in July so pay period is June)
T (PILON paid not including salary sacrifice) = ((9,000 x12) ÷ 365) x 84 = £24,854.10
((10,000 × 84) ÷ 30) – 24,854.10 = £3,415.90 – must be taxed from any compensation payment

Alternatives:

If, for example, the employee is working part of the notice (4 weeks, for example) and paid PILON (to be taxed in the usual way) on the remainder of the notice, then:
BP is £10,000 (including £1,000 salary sacrifice)
D is now 56 days  (84 – 28)
P is 30 days as above
T would be 16,615.38  (representing 56 days PILON not including salary sacrifice à ((9000 x 12) ÷ 365) x 56 = 16,569.86).
PENP = ((10,000 x 56) ÷ 30) – 16,569.86  = 2096.81  – must be taxed from any compensation payment.

If there is no salary sacrifice and employee not working any notice – last pay period was a 30 day month
BP is £10,000
D is 84 days (12 weeks)
P is 30 days as above
T is ((10,000 x 12) ÷ 52) x  = £27,692.31
PENP is  ((10,000 x 84) ÷ 30) – £27,692.31 = £307.69 – must be taxed from ex-gratia

 

If there is no salary sacrifice and employee not working any notice – last pay period was a 31 day month
BP is £10,000
D is 84 days (12 weeks)
P is 31 days
T is ((10,000 x 12) ÷ 365) x 84 = £27,616.31
PENP is  ((10,000 x 84) ÷ 31) – £27,616.31 = – £519, meaning PENP is nil and no additional tax paid on ex gratia