Calcultating final pay when someone leaves a job

    final pay when somone leaves a job


    Calculating final pay when someone leaves a job

    Employee final pay is the final pay packet paid by an employer to an employee when that employee is leaving their employment.

    A calculation of such pay should consider the terms of the employee’s employment contract and circumstances of employment, as well as statutory law.

    This employee final pay guide for employers will help you to understand both an employer’s obligations and an employee’s rights under UK law. A balance between protecting both positions is essential.

    Employer’s obligations when an employment contract is terminated

    The first step for an employer in this situation is to check the employment contract of the exiting employee. Whether they are in full-time employment or on a fixed-term contract, they are legally entitled to all the pay owed to them until their exit.

    It will likely be the case that an employee will leave their employment part way through a month, so their pay should be calculated from the first day of the pay period up until the day they leave. This can be worked out by a simple calculation, whether for salaried employees on an annual salary or for workers on an hourly rate. The employment contract will detail their annual or hourly pay or pay for contracted employees.

    Employers should also check the employment contract for any additional payments the employee is entitled to, such as bonus schemes, expenses allowance, any compensation they might be eligible to claim, as well as annual leave allowance. Any deductions that the employer is entitled to make should also be made. All these factors need to be taken into account in calculating the final pay owed to the employee and are explained in more detail below.

    An employer should also consider an employee’s income tax and National Insurance contributions position, as this may affect the final payment due to the employee. Certain termination payments should be paid to the employee free of tax. An employer should inform HM Revenue and Customs (HMRC) when an employee leaves or retires and ensure the right tax and National Insurance are paid.

    Above all, an employer should always ensure that an employee fully understands how their final pay is calculated and issue a detailed payslip to this effect.

    Employee rights at the end of an employment contract

    An employee is entitled to their fair remuneration on exiting their employment and should
    be diligent about checking the terms of their employment contract. They are legally entitled to a full payslip detailing working hours, gross payments, and deductions. If they have any queries, or note any discrepancies, these will usually be raised immediately and before exit. An employee has three months less one day from the date the final payment is made to claim any monies owed to them by their employer. If they do not make a claim within this time, they lose the right to recoup any missing funds they believe they are entitled to.

    How is final pay calculated?

    An employer will need to calculate the employee’s final pay from the first day of the pay period up until the day the employee leaves, which may be part way through a month.

    The calculations to be made depend on the employee’s basis of employment. The employment contract should also specify annual or hourly pay as well as details of pay for contracted employees.

    Salaried employees

    The final pay calculation for employees on a salary is to take their annual salary and divide this by 52. This is their weekly pay rate. This weekly rate is then divided by the number of days in their working week (usually 5 days) which will give you their daily pay. You then multiply their daily pay by the number of days they have worked since the end of the last pay period.

    Hourly-rate employees

    Calculate the final pay for employees engaged on an hourly-rate basis by multiplying their hourly rate by the number of hours they have worked since the last pay period.

    However, as well as these initial basic calculations, various additional factors should also be considered for the final pay calculation.

    Notice period

    The employment contract should be checked to confirm how much notice the employee should give. This will either be the statutory notice period, being the legal minimum, or a contractual notice period, which is typically longer and specific to the employee.

    Employees are entitled to their full pay when working during their notice period. If weekly pay differs, an average should be used in calculating notice pay, including any bonuses or overtime pay.

    If an employee is off work during their notice period, due to holiday, sickness, or maternity leave, for example, the notice pay they are entitled to will depend on their notice period and whether they have been dismissed or made redundant or whether they are resigning.

    If the former, an employee is entitled to full normal pay if their contractual notice is the same as, or up to one week longer than, the statutory notice period. If the notice period is longer than statutory by a week or more, an employee is only entitled to the relevant pay in relation to the reason they are off work in the first place.

    If an employee is resigning and off work during their notice period, their notice pay rights depend on whether they are entitled to a contractual or statutory dismissal notice period. If less than a week longer than the statutory notice period, they are entitled to one week’s full pay, and then only allowed the relevant pay for the reason they are off work for any subsequent weeks. If the dismissal notice period is more than a week longer than the statutory notice period, again they are only entitled to the pay relevant to the reason they are off work, during the notice period.

    If an employee leaves without working their notice, they should aim to come to an agreement with their employer in that respect; otherwise, they may be in breach of contract and be sued for any extra costs the employer might incur as a result. The employer is only liable for paying the employee for the time they have worked, including any unused annual leave.

    Annual leave allowance

    An employee is entitled to be paid for any unused statutory annual leave. This annual leave is normally apportioned over the company’s financial year. Employers may try and encourage employees to take any leftover holiday before their exit. If more than 5.6 weeks of leave is stipulated in the employment contract, the employer may wish to come to a separate arrangement with the employee for any leftover leave.

    Bonuses or commission payments and overtime

    These need to be calculated and included in the final pay packet if the employee is entitled to these under the terms of their employment contract.

    Statutory sick pay

    An employee may be eligible for this, if unable to work during their notice period.


    An employee is entitled to be refunded for any agreed expenses incurred in the execution of their employment.

    Maternity/paternity leave, adoption leave, shared parental leave and dependant leave

    Sometimes, an employee may be eligible to claim additional payments in relation to these benefits, both statutory and contractual.


    An employee may either be eligible for the statutory level of redundancy payment, or an enhanced contractual redundancy payment as specified in their employment contract. Any payment less than the statutory payment is not lawful.

    To be eligible for redundancy payment, an employee must have worked for their employer for at least two years continuously. (Continuous employment may occasionally be brought forward from previous employment under the TUPE rules.) The level of payment will then be dependent on the age of the employee and the number of full years of employment.

    An employee up to 22 years of age would be entitled to half a week’s normal pay for every full year of employment, whereas someone aged 41 and over is entitled to 1.5 week’s pay for every full year worked. Anyone aged 22 to 40 can claim one week’s pay for each full year.

    Redundancy payments should be paid free of tax up to a threshold of £30,000 (as should tribunal awards and settlement agreements or other compensation for loss of employment).

    Making deductions from final pay

    Employers may make deductions where an employee has taken too much paid holiday entitlement if this is either stipulated in the employment contract or agreed in writing in advance.

    Likewise, employers can make deductions for training courses attended by an employee, if agreed in the contract or in writing prior to the course taking place. Such deductions can only take an employee’s pay below the National Minimum Wage if the employee agreed to pay back these costs, and they were subsequently dismissed or they resigned. Advice should be sought if the employee was made redundant in this scenario.

    Loans to employees can also be deducted, as can contractual maternity pay where the employee has failed to return to work, if these deductions are agreed in the employment contract.

    An employer can however claim back an overpayment of wages without prior agreement or any relevant clause in the contract. This deduction should be made very clear on the final payslip though.

    When does an employer have to make the final payment?

    An employer can make this final payment on the usual pay day of the month and has no obligation to make the payment earlier, even if the employee leaves earlier than this date. This final payment date is the date from which point the employee has three months less one day to claim any monies they believe are still owing to them.

    What happens if an employee disputes the final pay packet?

    If an employee believes the final pay packet is incorrect, they should to query any discrepancies as soon as possible by approaching their employer for an informal discussion in person, if such discrepancies have come to light before exit, or more formal discussions by telephone, letter, or email, if after exit, in the hope that any issues can be resolved amicably and easily. If the pay slip is incorrect, any additional pay owed to the employee should be paid straight away; an employee should not have to wait until the next formal pay date to receive these extra monies.

    If informal talks prior to exit are unsuccessful in resolving disputed pay, the employee can lodge an official grievance under the company policy. If an employee has already left their employment and initial correspondence with their former employer is unsuccessful, they may proceed to bring a claim to the employment tribunal.

    Best practice advice for employers

    An employer might find themselves being sued by their former employee in court, if less formal attempts to resolve the situation have failed. This is always a risky option as if an employer loses the case, they will be liable not only for payment of the disputed monies owing to the employee, but also for the employee’s legal costs, as well as their own. It is always advisable to attempt a resolution well before this.

    An employer should inform HMRC when an employee leaves their employment and issue the employee with a P45. Their leaving date should be put on their payroll record when they are last paid, if they are leaving in the current tax year, and deductions should be made as normal in the next Full Payment Submission (FPS).

    If an employee is leaving in the next tax year but has already had their final payment in the current year, their leaving date should be included in the first FPS of the new tax year. If a wrong leaving date is given, or not reported at all, payroll records can be updated, and the leaving date reported in the next FPS.

    If an employer is paying a company pension to the employee, or paying statutory maternity or paternity pay, their leaving date should not be included in the FPS as the employee will remain on the payroll.

    Final pay rules FAQs

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    Legal disclaimer

    The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.



    Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

    Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing & Content Agency for the Professional Services Sector.

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