I'm on level 6, i've used my blackjack so far to just knock enemies out.. if I decided to use my sword and kill people for a change will I be punished? or does the game reward me for knocking out people instead?

On certain missions and/or difficulty settings, you are straight-up forbidden from killing anyone, as in the mission will fail if you do so. If there is no such limitation in the objectives list, then there's no difference whether you kill someone or knock them out, if you can get rid of the body and blood.

thanks! yeah, I've had the odd mission of not killing people but so far, I've not tried my sword so fancied lopping someones head off. ha!

Be aware that knock outs are pretty close to silent, but kills are always loud (and generally bloody). If there is a line of guards, you could start in the back and knock them out one after another, but killing the one in the back will cause enough noise to alert all the others.

All of that assumes that you don't have a mission objective that says "Don't kill Innocents/Anyone", in which case you fail if you violate the objective.