When it’s time to let an employee go, whether it’s willingly or unwillingly, you’ll be faced with a list of tasks and things you’ll need to consider when they leave. One of the most essential tasks is working out the employee’s final pay.
Final pay is the amount of money you as an employer owe an individual when they leave your business. Unfortunately, there’s no easy fixed amount to hand over, as each member of staff will have varying amounts of basic pay, as well as different entitlements to redundancy pay, bonuses, and other extras offered by your company.
Instead, each employee’s final pay will have to be carefully calculated to ensure the amount is accurate. We’ve put together this guide to help take the stress out of the process and reduce the risk of incorrect payments.
Before you calculate final pay
Although it may be tempting to rush straight in to the calculations and get the difficult part over with, it’s important to gather together all the information you’ll need first.
The first port of call should always be the individual’s contract of employment. This will be where you’ll find all the relevant details of the employee’s basic pay and their entitlements to other types of payment.
If the individual is paid according to the hours they work, you’ll also need copies of their timesheets in order to help calculate how much they’re owed.
Who is entitled to final pay?
All employees have the right to be paid their normal rate for their notice period (unless they are being terminated for gross misconduct), as well as being entitled to any accrued but untaken annual leave and any extra payments that are detailed in their contract.
Take care to treat dismissed employees the same as any other, and don’t be tempted to try and withhold any payments from them. This could result in you being at the receiving end of a claim.
How to calculate an employee’s final pay
Final pay calculator
To work out final pay, you’ll need to first determine the amount of outstanding basic pay between the end of the employee’s last pay period and their leaving date. The calculation you use will depend on whether the individual earns a salary (paid a fixed amount per pay period) or a wage (paid by hours worked).
Employees on a salary
Divide their annual salary by 52 to get their weekly pay.
Then, divide their weekly pay by the number of days in their working week (so 5 if full time) to get their daily pay.
Lastly, multiply their daily pay by the number of days worked since the end of the last pay period.
Employees on an hourly wage
Simply multiply their hourly wage by the number of hours worked since the last pay period.
See how our software can help
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Other factors involved in final pay
If you make an employee redundant, they will be entitled to redundancy pay if they have worked for you for over 2 years. The amount will vary according to the individual’s age and how long they’ve worked for you, and for 2019 and 2020 is capped at a rate of £525 per week (apart from in Northern Ireland).
Need to calculate someone’s redundancy pay? Try our redundancy pay calculator.
Untaken annual leave
If a member of staff is unable to take some of their holiday entitlement within the notice period, you’ll have to make an equivalent payment for outstanding annual leave as part of their final pay.
Employees who are off sick during their notice period will usually be entitled to receive full pay for their notice period, even if they are only receiving Statutory Sick Pay.
As above, individuals on maternity, paternity or shared parental leave will receive their normal rate of pay within their notice period.
If an employee on maternity leave resigns or is made redundant on or after the 15th week before their baby is due, you will have to continue to pay their Statutory Maternity Pay (SMP) for the full 39 weeks. You will then be able to claim back some or all of the SMP from HMRC.
If a member of staff is waiting to be reimbursed for an expenses claim they’ve made, it’s easiest to include this, too, in their final payment when leaving your business.
Tax on final pay
Final pay for employees will be subject to National Insurance and Income Tax deductions, just like their regular pay. However, there will be a £30,000 cap on the following:
- Statutory and enhanced redundancy payments
- Compensation for loss of employment
Reminders before you go
- Check the employee’s contract before rushing into calculations
- Calculate the employee’s amount of basic pay owed according to their wage or salary
- Don’t forget to take into account overdue expenses, untaken annual leave and any other factors affecting pay
Our HR software can help you to accurately calculate an employee’s final pay.
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The content of this blog is for general information only. Please don’t rely on it as legal or other professional advice as that is not what we intend. You can find more detail on this in our Terms of Website Use. If you require professional advice, please get in touch.
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