6 min read | 6 September, 2018 By Sarah Benstead
As an employer, from time to time you'll 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.
We’ve put together a guide to make calculating final pay a breeze and save you valuable time.
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:
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.
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)
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)
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)
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.
No two employees’ circumstances are the same, meaning there can be several possible factors that can cause their final pay to be compromised.
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.
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.
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:
If during their notice period an employee does not need to be at work due to gardening leave, you'll still need to pay them as normal.
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: