What are employee final payments?

When one of your employees resigns or is terminated, attention quickly turns to hiring a replacement...perhaps too quickly

But wait — there’s still the matter of processing your departing worker’s final pay.

Whether the employee is leaving with fond farewells, or under a dark cloud, they’re still entitled to all the pay and bonuses they’ve earned at your company.

So how do you calculate and process these final payments?

Start with the employment contract

Pay is a matter strictly protected by law — so naturally, you’ll want to process final payments fairly and without dispute. A good first step is to check the employment contract for special terms on final pay.

The worker might be a full employee, on a fixed-term contract, or on a zero-hours contract. In each case, they have a legal right to all of the pay owed to them.

Check for:

  • Variable financial incentive schemes, such as individual or group bonuses
  • Annual leave allowance
  • Expense allowances due
  • Special contract terms for employee compensation

Any bonuses or other amounts due should be included in final payments.

Processing final pay for leavers

The most common final pay situation you’ll have to handle is when an employee leaves your organisation.

It’s likely the worker will leave in the middle of their current pay period. This means you’ll have to calculate their earnings from the beginning of the pay period to their last working day.

For salaried employees, this might be:

Annual salary/working days in the year x days worked this period

For workers paid hourly, it will usually be:

the number of hours worked x their hourly rate

Similar calculations may apply to contracted workers, but you should check the employment contract carefully before you act.

The income tax and NIC situation

Part of an employee’s termination payment might not be subject to income tax or National Insurance contributions (NICs).

There is a £30,000 tax-free threshold for termination payments for:

  • Compensation for loss of employment
  • Tribunal awards and settlement agreements
  • Statutory and enhanced redundancy payments

Ordinary payments under the employment contract, such as salary and bonuses described above, are subject to income tax and NICs.

Payments for unused annual leave

All workers must be paid for annual entitlement they haven’t used. You may want to encourage leavers to take leftover holidays during their notice period.

If the employment contract offers more than 5.6 weeks of annual leave, you can agree a separate arrangement with the worker for their leftover leave.

Holiday debt contract terms

Some departing workers will have taken more paid holidays than their contract allows. In these cases, you can only take money from their final pay if you’ve agreed it with them beforehand in writing — so it can be useful to include these terms in the employment contract.

Employee terminations and final pay

Final payments for dismissed employees must be handled the same way as other departing employees.

Even if the worker has been fired for gross misconduct, they’re still entitled to their earnings, unused annual leave payment, and other contractual entitlements.

Final payments for deceased employees

If one of your employees dies suddenly, their final pay usually goes to their personal representative — usually the executor of their will. You should also complete a P45.

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