As an employer you will from time to time be faced with employees leaving the company and moving onto pastures new.
Whether they’ve worked their notice or if their journey with your company took an unfortunate turn that lead to dismissal, an employee is still entitled to receive the remuneration that they have earned whilst working for you, and you will need to calculate their final pay.
While the obvious basic formula for final pay is ‘salary vs. hours worked’, each case is different and a variety of factors can mean the calculation becomes a bit of a headache.
But, here at breathe we’ve put together a guide designed to save you time and help you out when it comes to calculating an employee’s final pay packet, making it a breeze.
Before calculating final pay
Paying someone correctly is a legal requirement, so it’s important you get it right. But, before getting onto the numbers themselves, make sure you have:
- Checked their employment contract for special terms on final pay
- Checked their annual leave allowance for any outstanding accrued entitlement
- Ensured all outstanding expense claims have been settled
- Taken into account any financial incentive schemes e.g. group/individual bonuses
How to calculate gross final pay
It isn’t often that an employee’s last day will fall exactly at the end of the month, so it’s likely that you’ll have to do a few sums to work out what they’re owed. Here’s how to calculate final pay for employees on different pay structures.
Calculate how much they earn in a day
- Employee on a salary
Annual salary ÷ 52 (no. of weeks in year) = Weekly pay
Weekly pay ÷ 5 (or no. of days in working week) = Daily pay
For example, if the employee’s annual salary (before tax) is £25,000:
£25,000 ÷ 52 = £480.77 (weekly pay)
£480.77 ÷ 5 = £96.15 (daily pay)
- Employee on a monthly rate
Monthly pay x 12 = Annual pay
You can then use the above formula for a salaried employee to calculate their daily rate.
For example, if the employee’s monthly pay (before tax) is £1,200 and they work 5 days a week:
£1,200 x 12 = £14,400 (annual pay)
£14,400 ÷ 52 = £276.92 (weekly pay)
£276.92 ÷ 5 = £55.38 (daily pay)
- Employee on a bi-weekly rate
Bi-weekly pay x 26 = Annual salary
Again, you’ll need to use the formula for a salaried employee to figure out their daily rate.
For example, if the employee’s bi-weekly rate is £2,000 before tax and they work three days a week:
£2,000 x 26 = £52,000 (Annual pay)
£52,000 ÷ 52 = £1,000 (Weekly pay)
£1,000 ÷ 3 = £333.33 (Daily pay)
Work out how many days they've worked
Now that you've worked out the employee's daily pay, all you need to do is multiply this by the amount of days they have worked in that pay period.
For example, if the employee’s daily pay is £55.38 and they’ve worked 10 days within that pay period, their gross final pay would be £553.80.
Factors that can affect final pay
No two employees’ circumstances are the same, meaning there can be several possible factors that can cause their final pay to be compromised.
Leftover annual leave
If an employee has resigned from their role, they have the right to be paid for any annual leave that they have accrued but haven’t used. Alternatively, you may want to give them the choice to take their leftover leave during their notice period.
However, if the employee was dismissed due to gross misconduct, they will still need to be paid for their outstanding holiday and it is unlikely that they will be given a notice period.
If as an employer you’ve found yourself in the difficult position of having to make one or more employees redundant, you’ll need to know where you stand with redundancy pay.
If an employee has been with the company for more than two years, they will be entitled to statutory redundancy pay. The amount they receive relates to their age and length of service.
Frustration of the employment contract
When an employee has neither been dismissed or handed in their notice, it’s known as frustration of the employment contract. This can happen if the employment contract is impossible or unlawful to continue, or if the unexpected happens (e.g. imprisonment of an employee).
Although one of the rarer circumstances, if this should take place all outstanding pay and annual leave must be paid, but a notice period is not necessary.
NIC and income tax
Ordinary payments as part of the contract of employment (e.g. salary and bonuses) are subject to tax. However, in some cases, an employee’s final pay packet may not be subject to National Insurance contributions (NIC) or income tax. A £30,000 cap applies to termination payments for instances including:
- Settlement agreements and tribunal awards
- Statutory and enhanced redundancy payments
- Compensation for loss of employment
If during their notice period an employee does not need to be at work, you will still be required to pay them as normal.
Final things to consider when an employee leaves
Now that you’ve issued an employee with their final pay, there are a few other things to consider before they depart from the company:
- A P45
- Final pay statement
- The return of any company assets (e.g. computer, car)
- Conduct an exit interview