Income Tax (Earnings and Pensions) Act 2003 section 402D

Post-employment notice pay

Section 402D sets out how to calculate the "post-employment notice pay" (PENP) when an employee's employment is terminated, which represents the amount of a termination payment that is equivalent to the pay the employee would have received had they worked their full notice period.

• PENP is calculated using the formula ((BP × D) / P) − T, where BP is basic pay in the last pay period, D is the number of days in the unworked notice period, P is the number of days in that pay period, and T is any termination-related payment already taxed as earnings (excluding holiday pay and termination bonuses).
• Basic pay is narrowly defined to include only core salary, excluding overtime, bonuses, commissions, gratuities, allowances, benefits in kind, amounts treated as earnings under the benefits code, and any income relating to securities or share options.
• Simplified or alternative versions of the formula apply where there is no completed pay period before the trigger date, or where the employee is paid monthly and notice periods are expressed in whole months.
• An anti-avoidance rule prevents any arrangements designed to artificially reduce the PENP calculation, ensuring the figure is treated as what it would have been without those arrangements.