Whether it's due to resignation or termination, one crucial task that you must handle as an employer is calculating your employee's final pay. Final pay refers to the amount of money owed to an employee when they leave your company.
Determining this final pay is not a one-size-fits-all calculation. Various factors such as the employee's basic pay, entitlements, and other extras outlined in their employment contract come into play and may influence your employee’s final pay. In this comprehensive guide, we will explore the intricacies of calculating final pay, ensuring accuracy and fairness for both employers and employees.
Gather the Necessary Information to Include in Their Final Pay
Your first step will be to take a holistic view of your employee’s employment situation and gather all the relevant information required for accurate final pay calculations. All employees are entitled to certain components in their final pay. These components include:
- their normal rate for the notice period
- accrued annual leave that hasn’t been taken yet
- any other additional payments specified in their employment contract (see below for a few examples).
It is crucial that you treat all employees equally whenever they leave your company. You cannot withhold any payments owed to them, even if they’ve been dismissed for gross misconduct. Failure to do so may result in potential legal consequences and claims against your company.
Below are a list of the payment elements you’ll need to check when gathering all necessary information for your employee’s final pay:
- Their contract of employment: This document holds crucial details such as the employee's basic pay, entitlements, notice period, and any additional payments outlined in their employment agreement. If the employee is paid on an hourly basis, gather their timesheets to determine the exact amount owed based on the hours they worked.
- The holiday they’ve taken to date this year: employees are entitled to 5.6 weeks per year for a full-time role. If they leave part-way through the year, you’ll need to calculate the pro-rated equivalent of this amount.
- Any company asset/property they’ve been provided with at the start of their employment: this can include a work laptop, a company car, etc. Some companies offer employees to buy their work laptop at a reduced price and deduct it from the employee’s final pay. If this is something you’d like to offer to your employee, make sure to iron out details before you run payroll.
- Ongoing recurring deductions, such as a cycle-to-work reimbursement scheme or season ticket: any remaining balance from these schemes will need to be deducted from the employee’s final pay.
- Any final reimbursements for expenses due: if so, you’ll need to either add those to their final pay, or pay them back separately.
More on holiday pay:
- How is Holiday Pay Calculated? A Guide for Employers
- How to calculate holiday entitlement for part time employees and workers?
Calculate the Employee’s Final Pay
The calculation method to calculate your employee’s final pay will vary depending on whether they’re salaried or paid on an hourly basis. Let's explore the calculation process for each scenario:
Final Pay for Salaried Employees
For employees on a salary, the final pay calculation involves a few steps:
- Agree with your employee what their final day will be. You’ll need to pay their entire notice period even if they don’t work it.
- Based on that final employment date, you’ll need to calculate their final salary and any additional notice period pay. Check how to calculate a pro-rata salary.
- Now calculate their holiday accrual. This amount can be a bonus or deduction, depending on how much time-off they’ve taken up to their final day of employment.
- Add any additional pay or deductions mentioned above to the final pay.
- You now need to figure out how much tax is applied to the employee’s final pay. Depending on how you run payroll, you can get these figure through a payroll software or your accountant. Unless your employee is leaving through a redundancy process, any additional pay added to their final pay is taxed like regular income (including holiday pay).
Final Pay for Hourly-Rate Employees
Calculating the final pay for employees paid on an hourly basis is relatively straightforward. Multiply the employee's hourly wage by the number of hours worked since the last pay period to determine the final pay owed:
- Agree with your employee what their final day will be. You’ll need to pay their entire notice period even if they don’t work it. Check how to calculate a pro-rata salary.
- Now calculate their holiday accrual, which is a slightly different process than for a salaried employee. This amount can also be a bonus or deduction, depending on how much time-off they’ve taken up to their final day of employment.
- Add any additional pay or deductions mentioned above to the final pay.
- You now need to figure out how much tax is applied to the employee’s final pay. Depending on how you run payroll, you can get these figure through a payroll software or your accountant. Unless your employee is leaving through a redundancy process, any additional pay added to their final pay is taxed like regular income (including holiday pay).
Additional Factors That May Affect Final Pay
In addition to the basic pay calculations, several other elements may come into play when calculating your employee's final pay. These factors include redundancy payments, sick pay, family leave entitlements, expenses, and more. Let's delve into each of these factors:
Redundancy Payment
If you’re making an employee's redundant, they may be entitled to redundancy pay. The specific amount of redundancy pay varies based on factors such as the employee's age, length of service, and the capped rate set by the government for a given year.
If you’re running a redundancy process, we’d recommend checking ACAS’ guide for employers or get specialised advice on how to run a compliant process.
Sick Pay
It’s worth noting that if an employee is absent due to sickness during their notice period, they are generally entitled to receive full pay for the duration of their notice period.
Even if the employee is only eligible for Statutory Sick Pay (SSP), you must provide full pay during the notice period.
Family Leave
Employees on maternity, paternity, or shared parental leave are entitled to receive their normal rate of pay during their notice period.
For example, if an employee on maternity leave resigns or is made redundant after the 15th week before their baby is due, you must continue paying Statutory Maternity Pay (SMP) for the full 39 weeks.
Expenses
If an employee has submitted an expenses claim that is awaiting reimbursement, you should pay this amount back in their final pay or before their employment ends. This ensures that all outstanding expenses are settled and avoids any potential misunderstandings or disputes with them.
Tax Considerations
As mentioned earlier, an employee’s final pay is subject to the same tax and National Insurance (NI) deductions as regular pay, with a few exceptions. This means you’ll need to deduct the appropriate amounts for income tax and NI contributions from the employee's final pay.
Certain payments, such as statutory and enhanced redundancy payments and compensation for loss of employment benefit from a tax-free £30,000 cap. If you’re in the situation where you have an employee benefitting from a tax-free amount, we’d really recommend working out employment taxes with your accountant or through a payroll software.
Once you’re happy with your final pay’s calculations and tax liabilities, it’s time to run your payroll process and submit figures to HMRC as you normally do.
What Comes Next: Payslip, P45 and Offboarding
Once you’ve submitted payroll for the month, you’ll need to send your employee their final pay, payslip and P45:
- A P45 is a document that contains useful information such as the tax code applicable to an employee when they leave a company, as well as their National Insurance number and any student loans they may still be paying off. HMRC gives more details on how to provide one.
- Their final payslip should detail their pay, notice period, any holiday accrual bonus or deductions, and any additional payments or deductions due too.
Other steps that will need to be done are relating to the employee’s offboarding from your company. Those can include:
- notifying your pension provider that the employee’s leaving
- organising a courier to recoup the employee’s work laptop
- removing the employee’s access to the company’s communication tools (for eg Slack, Google suite, etc)
- carrying out an exit interview with the employee which can be a great way to gather feedback on your company.
Automatic final pay calculations and 2-step offboarding process with Onfolk
An employee leaving your company comes with complex pay calculations, numerous offboarding tasks on top of everything else you’re running in your company.
Using a combined payroll & HR software can help you save a lot of time on these admin tasks.
Take Onfolk, for example. Onfolk’s automated payroll calculates all final pay details for you, automatically: their final pay, notice pay, holiday accrual pay and any other deductions due.
Our employee offboarding process takes care of offboarding them from the platform, calculating their final pay, send them their final payslip and P45. All in a couple of clicks:
If you’re looking to save time (and money) on payroll and HR admin tasks, get in touch.
About Onfolk
Onfolk is a payroll company software that offers HR software with payroll integrated to it in order to minimise the amount of admin involved with paying your team and managing their data.
Think effective payroll automation, allowing to run payroll in the UK in a matter of minutes. It is also an official HMRC payroll software, meaning all HMRC reporting is done automatically for you every month. If you’re familiar with Gusto in the US, Onfolk is exactly that for the UK.
Our customers’ favourite features include:
- 90% automated payroll every month
- Full GDPR compliance, with all employee and payroll data encrypted and securely stored in the cloud
- HRIS synced with payroll - specialised in small business payroll software
- Time off management and annual leave calculations included
- Automated onboarding and offboarding
- Pensions fully integrated with Nest, Smart Pensions and more
- Integrations with accounting softwares such as Xero and Quickbooks
- People insights, custom reports and org charts come built in
Whether it's due to resignation or termination, one crucial task that you must handle as an employer is calculating your employee's final pay. Final pay refers to the amount of money owed to an employee when they leave your company.
Determining this final pay is not a one-size-fits-all calculation. Various factors such as the employee's basic pay, entitlements, and other extras outlined in their employment contract come into play and may influence your employee’s final pay. In this comprehensive guide, we will explore the intricacies of calculating final pay, ensuring accuracy and fairness for both employers and employees.
Gather the Necessary Information to Include in Their Final Pay
Your first step will be to take a holistic view of your employee’s employment situation and gather all the relevant information required for accurate final pay calculations. All employees are entitled to certain components in their final pay. These components include:
- their normal rate for the notice period
- accrued annual leave that hasn’t been taken yet
- any other additional payments specified in their employment contract (see below for a few examples).
It is crucial that you treat all employees equally whenever they leave your company. You cannot withhold any payments owed to them, even if they’ve been dismissed for gross misconduct. Failure to do so may result in potential legal consequences and claims against your company.
Below are a list of the payment elements you’ll need to check when gathering all necessary information for your employee’s final pay:
- Their contract of employment: This document holds crucial details such as the employee's basic pay, entitlements, notice period, and any additional payments outlined in their employment agreement. If the employee is paid on an hourly basis, gather their timesheets to determine the exact amount owed based on the hours they worked.
- The holiday they’ve taken to date this year: employees are entitled to 5.6 weeks per year for a full-time role. If they leave part-way through the year, you’ll need to calculate the pro-rated equivalent of this amount.
- Any company asset/property they’ve been provided with at the start of their employment: this can include a work laptop, a company car, etc. Some companies offer employees to buy their work laptop at a reduced price and deduct it from the employee’s final pay. If this is something you’d like to offer to your employee, make sure to iron out details before you run payroll.
- Ongoing recurring deductions, such as a cycle-to-work reimbursement scheme or season ticket: any remaining balance from these schemes will need to be deducted from the employee’s final pay.
- Any final reimbursements for expenses due: if so, you’ll need to either add those to their final pay, or pay them back separately.
More on holiday pay:
- How is Holiday Pay Calculated? A Guide for Employers
- How to calculate holiday entitlement for part time employees and workers?
Calculate the Employee’s Final Pay
The calculation method to calculate your employee’s final pay will vary depending on whether they’re salaried or paid on an hourly basis. Let's explore the calculation process for each scenario:
Final Pay for Salaried Employees
For employees on a salary, the final pay calculation involves a few steps:
- Agree with your employee what their final day will be. You’ll need to pay their entire notice period even if they don’t work it.
- Based on that final employment date, you’ll need to calculate their final salary and any additional notice period pay. Check how to calculate a pro-rata salary.
- Now calculate their holiday accrual. This amount can be a bonus or deduction, depending on how much time-off they’ve taken up to their final day of employment.
- Add any additional pay or deductions mentioned above to the final pay.
- You now need to figure out how much tax is applied to the employee’s final pay. Depending on how you run payroll, you can get these figure through a payroll software or your accountant. Unless your employee is leaving through a redundancy process, any additional pay added to their final pay is taxed like regular income (including holiday pay).
Final Pay for Hourly-Rate Employees
Calculating the final pay for employees paid on an hourly basis is relatively straightforward. Multiply the employee's hourly wage by the number of hours worked since the last pay period to determine the final pay owed:
- Agree with your employee what their final day will be. You’ll need to pay their entire notice period even if they don’t work it. Check how to calculate a pro-rata salary.
- Now calculate their holiday accrual, which is a slightly different process than for a salaried employee. This amount can also be a bonus or deduction, depending on how much time-off they’ve taken up to their final day of employment.
- Add any additional pay or deductions mentioned above to the final pay.
- You now need to figure out how much tax is applied to the employee’s final pay. Depending on how you run payroll, you can get these figure through a payroll software or your accountant. Unless your employee is leaving through a redundancy process, any additional pay added to their final pay is taxed like regular income (including holiday pay).
Additional Factors That May Affect Final Pay
In addition to the basic pay calculations, several other elements may come into play when calculating your employee's final pay. These factors include redundancy payments, sick pay, family leave entitlements, expenses, and more. Let's delve into each of these factors:
Redundancy Payment
If you’re making an employee's redundant, they may be entitled to redundancy pay. The specific amount of redundancy pay varies based on factors such as the employee's age, length of service, and the capped rate set by the government for a given year.
If you’re running a redundancy process, we’d recommend checking ACAS’ guide for employers or get specialised advice on how to run a compliant process.
Sick Pay
It’s worth noting that if an employee is absent due to sickness during their notice period, they are generally entitled to receive full pay for the duration of their notice period.
Even if the employee is only eligible for Statutory Sick Pay (SSP), you must provide full pay during the notice period.
Family Leave
Employees on maternity, paternity, or shared parental leave are entitled to receive their normal rate of pay during their notice period.
For example, if an employee on maternity leave resigns or is made redundant after the 15th week before their baby is due, you must continue paying Statutory Maternity Pay (SMP) for the full 39 weeks.
Expenses
If an employee has submitted an expenses claim that is awaiting reimbursement, you should pay this amount back in their final pay or before their employment ends. This ensures that all outstanding expenses are settled and avoids any potential misunderstandings or disputes with them.
Tax Considerations
As mentioned earlier, an employee’s final pay is subject to the same tax and National Insurance (NI) deductions as regular pay, with a few exceptions. This means you’ll need to deduct the appropriate amounts for income tax and NI contributions from the employee's final pay.
Certain payments, such as statutory and enhanced redundancy payments and compensation for loss of employment benefit from a tax-free £30,000 cap. If you’re in the situation where you have an employee benefitting from a tax-free amount, we’d really recommend working out employment taxes with your accountant or through a payroll software.
Once you’re happy with your final pay’s calculations and tax liabilities, it’s time to run your payroll process and submit figures to HMRC as you normally do.
What Comes Next: Payslip, P45 and Offboarding
Once you’ve submitted payroll for the month, you’ll need to send your employee their final pay, payslip and P45:
- A P45 is a document that contains useful information such as the tax code applicable to an employee when they leave a company, as well as their National Insurance number and any student loans they may still be paying off. HMRC gives more details on how to provide one.
- Their final payslip should detail their pay, notice period, any holiday accrual bonus or deductions, and any additional payments or deductions due too.
Other steps that will need to be done are relating to the employee’s offboarding from your company. Those can include:
- notifying your pension provider that the employee’s leaving
- organising a courier to recoup the employee’s work laptop
- removing the employee’s access to the company’s communication tools (for eg Slack, Google suite, etc)
- carrying out an exit interview with the employee which can be a great way to gather feedback on your company.
Automatic final pay calculations and 2-step offboarding process with Onfolk
An employee leaving your company comes with complex pay calculations, numerous offboarding tasks on top of everything else you’re running in your company.
Using a combined payroll & HR software can help you save a lot of time on these admin tasks.
Take Onfolk, for example. Onfolk’s automated payroll calculates all final pay details for you, automatically: their final pay, notice pay, holiday accrual pay and any other deductions due.
Our employee offboarding process takes care of offboarding them from the platform, calculating their final pay, send them their final payslip and P45. All in a couple of clicks:
If you’re looking to save time (and money) on payroll and HR admin tasks, get in touch.
About Onfolk
Onfolk is a payroll company software that offers HR software with payroll integrated to it in order to minimise the amount of admin involved with paying your team and managing their data.
Think effective payroll automation, allowing to run payroll in the UK in a matter of minutes. It is also an official HMRC payroll software, meaning all HMRC reporting is done automatically for you every month. If you’re familiar with Gusto in the US, Onfolk is exactly that for the UK.
Our customers’ favourite features include:
- 90% automated payroll every month
- Full GDPR compliance, with all employee and payroll data encrypted and securely stored in the cloud
- HRIS synced with payroll - specialised in small business payroll software
- Time off management and annual leave calculations included
- Automated onboarding and offboarding
- Pensions fully integrated with Nest, Smart Pensions and more
- Integrations with accounting softwares such as Xero and Quickbooks
- People insights, custom reports and org charts come built in
