When someone leaves, payroll has one chance to get the final pay right before the employment is closed with HMRC. Errors are awkward to fix afterwards, because the former employee has usually moved to a new job and tax code.
What goes into the final pay
| Element | Notes |
|---|---|
| Salary to the leaving date | pro rata for the final period |
| Untaken holiday | holiday accrued in the leave year but not taken is paid; excess holiday taken may be deducted only if the contract allows |
| Notice pay | paid in full whether worked or not; payment in lieu of notice (PILON) is taxable earnings and subject to NIC |
| Overtime, commission and bonus | if earned by the leaving date, under the contract or scheme rules |
| Deductions | outstanding advances, loans or training costs only with contractual or written agreement |
| Pension | contributions on final pay as usual |
The holiday calculation for staff on irregular hours uses the accrued entitlement (12.07% of hours worked for leave years starting on or after 1 April 2024) rather than a pro rata of a fixed allowance.
Termination payments
Payments for loss of office, such as compensation under a settlement agreement, can qualify for the £30,000 exemption from income tax, but amounts above it are taxed, and they attract employer Class 1A NIC above the threshold. PILON and payments for holiday or notice are always taxable earnings and never part of the exemption. Agree the classification before the pay run, and keep the settlement agreement with the payroll records. See settlement agreements.
Reporting the leaver
- Put the leaving date on the FPS for the final payment.
- Issue a P45 to the employee (parts 1A, 2 and 3), showing pay and tax to date in this employment. HMRC already knows the leaving date from the FPS; the P45 is the employee’s copy for their next employer.
- Stop pension contributions and tell the pension provider.
- Cancel recurring payments, benefits and company cards.
Payments after the P45
Sometimes a bonus or commission is paid after the P45 has been issued. It must still go through payroll:
- use tax code 0T on a non-cumulative basis (week 1/month 1);
- report it on an FPS with the original leaving date;
- deduct NIC as appropriate.
Do not reopen the employment or issue a second P45.
Bookkeeping
Accrue the final pay if it falls after a month or year end, and clear any balances on the employee’s advances or loan account. Unrecovered advances written off are taxable pay and go through payroll, not straight to bad debts.
A final check
- Payslip and P45 figures agree.
- Bank payment matches net pay.
- Holiday balance is nil in the HR system after payment.
- The pension provider has the leaving date.
For starters, see the starter checklist in payroll software; for holiday pay rules, holiday pay calculation in the UK.