How to calculate an employee's final pay

As an employer, from time to time you'll be faced with employees leaving the company and moving on to pastures new. This is a common situation that all employers will have to face at some point. In fact, as many as one in three UK employees move roles within a single year, a figure which has risen 9% since 2019.

 

Whatever the reason for the employee leaving, they're entitled to receive their final pay package once employment has finished. For the employer, this creates a key challenge: How do you calculate an employee's final pay?

In many ways, this is very similar to calculating a normal monthly payslip. However, there are some extra complexities you'll need to be aware of. In this piece, we explain what you need to know.  

If an employee is being made redundant, there are extra requirements you need to be aware of. Check out our redundancy pay calculator to find out more. 

 

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. Generally, that involves calculating the normal pay for a single day and multiplying that by the number of days worked.

Here's how to calculate final pay for employees on different pay structures:

 

1. Calculate how much they earn in a day

For employees on an annual salary

First, start with the full annual salary and then divide that by 52 to get a weekly pay rate. Then, you can divide that number by five to get a basic pay rate for a single working day (assuming five days are worked per week).

• 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 a full-time employee’s annual salary (before tax) is £25,000:

• £25,000 ÷ 52 = £480.77 (weekly pay)
• £480.77 ÷ 5 = £96.15 (daily pay)

 

For employees on a monthly rate

First, you need to convert the monthly pay into an annual salary:

• Monthly pay x 12 = Annual pay

Then, you can go back to the last section and follow the instructions to calculate the 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)

For employees on a fortnightly rate

Some employees are paid a flat rate every two weeks. To work out this rate, you'll have to again convert this into an annual salary:

• Fortnightly pay x 26 = Annual salary

Then, you can return to the first section and follow the steps outlined. For example, if the employee's fortnightly rate is £1,000 before tax and they work three days a week:

• £1,000 x 26 = £26,000 (Annual pay)
• £26,000 ÷ 52 = £500 (Weekly pay)
• £500 ÷ 3 = £166.66 (Daily pay)

 

2. 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 number of days they've worked since their last paycheck.

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 factors that can affect the final payslip.

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. This, in effect, will mean they leave sooner while still getting paid for the full notice period.

To calculate the holiday pay, you simply need to use the day rate we calculated in the last section, and multiply that by the number of unused days. Then, add that to the employee's final payslip.

If the employee was dismissed due to gross misconduct, there's a good chance there won't be a notice period. In this case, you'll still have to pay the employee for unused holiday days.

Redundancy pay

If you've had 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. Any redundancy terms in the employee's contract must be honoured as well, even if they go above the statutory requirements. The amount they receive relates to their age and length of service.

Frustration of the employment contract

When an employee leaves without handing in their notice, this is known as 'frustration of the employment contract'. This refers to when one or either party has broken the terms of the agreement, or if continuation of the contract would be impossible or unlawful (e.g. an employee is imprisoned).

In this case, you are required to pay the employee for all days worked, but there is no requirement to honour the notice period.

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
  

Gardening leave

Gardening leave occurs when an organisation would rather the employee doesn't work their notice period. There are many reasons for this, but the most common is for confidentiality. In this case, you still have to pay the employee for their full notice, as set out in this piece. The only difference is that the employee doesn't work during this period.

There is one exception to this: If both the organisation and the employee agree to bypass the notice period and end the contract early. In this case, you don't need to pay an employee for their notice period, since the contract has been altered by mutual consent.

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, phone, car)
• Conduct an exit interview. We have an easy-to-use exit interview template to help you through the process. 

Making final pay calculations a breeze

While calculating final pay owed can be confusing, it doesn't have to be. To get it right, it's helpful to have a clear understanding of what pay everybody is on, how much holiday they've taken and what bonuses or entitlements they're required to.

If you have all of this information in one place, calculating the final payslip is much easier. With Breathe, you can easily track employee information like holiday days from a single centralised location.

Find out more about tracking holidays and absences with Breathe.