Key facts
- Final pay must include pro-rata salary for the days worked in the final pay period.
- Accrued but untaken holiday must be paid as a holiday pay lump sum (unless the contract says otherwise).
- If the employee works their notice, they receive normal pay; payment in lieu of notice (PILON) may be taxable.
- Statutory redundancy pay up to £30,000 is tax-free, but contractual redundancy above this is taxed.
- The final payslip and P45 should be issued as soon as the final pay has been calculated.
Calculating Final Pay for Leavers
When an employee leaves — whether through resignation, redundancy, retirement, or dismissal — the employer must calculate and pay everything the employee is owed. Getting this right protects the employer from disputes and ensures the P45 figures are accurate.[1]
Components of Final Pay
Final pay typically includes several elements:
| Component | Description | Tax/NI Treatment |
|---|---|---|
| Pro-rata salary | Pay for days worked in the final pay period | Normal PAYE (taxable, NI-able) |
| Accrued holiday pay | Payment for untaken holiday entitlement | Normal PAYE |
| Notice pay (worked) | Normal pay during the notice period | Normal PAYE |
| PILON (contractual) | Payment in lieu of notice under a contract clause | Normal PAYE |
| PILON (non-contractual) | Payment in lieu of notice without a contract clause | Taxable as “relevant termination award” via special rules |
| Statutory redundancy pay | Calculated using statutory formula (age, service, weekly pay) | Tax-free (up to the statutory amount) |
| Contractual/enhanced redundancy | Any amount above statutory redundancy | First £30,000 tax-free (combined with statutory), excess taxed |
| Outstanding bonuses/commission | Earned but unpaid performance-related pay | Normal PAYE |
Calculating Pro-Rata Salary
If the employee leaves part-way through a pay period, you must calculate pro-rata pay. There are two common methods:
- Calendar day method: Annual salary ÷ 365 (or 366 in a leap year) × calendar days in the period
- Working day method: Annual salary ÷ total working days in the year × working days in the period
The method used should be specified in the employment contract or company policy. Be consistent across all employees to avoid discrimination claims.
Accrued Holiday Pay
Employees are entitled to be paid for any holiday they have accrued but not yet taken when they leave. The statutory minimum is 28 days (including bank holidays) for a full year. To calculate:[2]
- Calculate the pro-rata entitlement: (28 days ÷ 12) × completed months = accrued entitlement
- Subtract holiday already taken: accrued entitlement − days taken = days owed
- Calculate the daily rate: annual salary ÷ 260 (or actual working days)
- Multiply: daily rate × days owed = holiday pay due
Key point: If the employee has taken more holiday than they have accrued, the employer can only deduct the excess from the final pay if the employment contract contains a clawback clause. Without this clause, the employer cannot recover the overpaid holiday.
Notice Pay
The employee’s notice period is determined by their contract (or the statutory minimum if the contract is silent):
- Statutory minimum notice (employer giving notice): 1 week for each complete year of service, up to a maximum of 12 weeks
- Statutory minimum notice (employee resigning): 1 week (regardless of service length, unless the contract specifies more)
If the employee works their notice period, they receive normal pay. If the employer chooses to pay in lieu of notice (PILON), the tax treatment depends on whether the contract includes a PILON clause.
Redundancy Pay
If the employee is being made redundant with 2 or more years’ service, they are entitled to statutory redundancy pay:[3]
- Half a week’s pay for each full year of service aged under 22
- One week’s pay for each full year of service aged 22–40
- One and a half weeks’ pay for each full year of service aged 41 or over
Weekly pay is capped at £751 (2026/27) and maximum service counted is 20 years. Statutory redundancy pay is always tax-free. Any additional ex-gratia or contractual redundancy payment is tax-free up to a combined total of £30,000 (including the statutory element); amounts above £30,000 are subject to Income Tax and, from April 2020, employer NIC.
Tip: Process the final pay through your normal payroll run if possible. This ensures all PAYE calculations (cumulative tax, NI, student loans) are correct and the FPS is submitted accurately. Avoid making manual payments outside the payroll system, as this can create reporting errors.
Final Steps
After calculating and paying the final amount:
- Issue the final payslip showing all components of the final pay
- Submit the FPS to HMRC with the leaving date and final year-to-date figures
- Generate and issue the P45 (Parts 1A, 2, and 3 to the employee)
- Cancel any ongoing deductions (AEOs, payroll giving, etc.) and notify the relevant parties
- Update pension records — notify the pension provider that the employee has left
Frequently Asked Questions
How do I calculate pro-rata pay for a partial month?
Divide the annual salary by 12 to get the monthly rate, then divide by the number of calendar days (or working days, depending on your contract/policy) in the month and multiply by the days worked. For example, if the monthly salary is £3,000 and the employee leaves on 15 April (out of 30 days), the pro-rata pay is £3,000 ÷ 30 × 15 = £1,500.
Can I deduct pay for holiday taken but not yet accrued?
Only if the employment contract specifically allows it. If the contract includes a “clawback” clause, you can deduct the cost of holiday taken in excess of the pro-rata entitlement from the final pay. Without such a clause, you cannot make the deduction. It is good practice to include this provision in all employment contracts.
Is payment in lieu of notice (PILON) taxable?
If the employment contract includes a PILON clause, the payment is taxable as earnings and subject to Income Tax and NI in the normal way. If there is no PILON clause and the employer chooses to pay in lieu, the payment is treated as damages for breach of contract and the first £30,000 may be tax-free (as a termination payment). The tax treatment depends on the specific contractual terms.
What about outstanding expenses or loans?
Any expenses the employee has incurred on behalf of the business should be reimbursed in the final pay. Conversely, if the employee owes the employer money (e.g. an outstanding salary advance or season ticket loan), the employer can deduct it from the final pay only if the employment contract permits this or the employee gives written consent.
Further Reading
- The P45 Process — issuing the P45 after final pay has been calculated
- Statutory Deductions (Tax, NI, Student Loan) — how deductions apply to the final pay
- Payslip Legal Requirements — ensuring the final payslip meets legal standards
- Attachment of Earnings Orders — handling AEOs when an employee leaves
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Sources
- Running payroll: employees leaving — GOV.UK
- Holiday entitlement: calculate leave — GOV.UK
- Redundancy: your rights — GOV.UK