Ending Employment: Payroll Tasks to Complete Without Delay

When an employee leaves, their final pay often differs from their usual salary. Differences arise from accrued holiday, deductions, final expenses, bonuses, payments in lieu of notice (PILON), and payroll timing. Completing these tasks in the correct order reduces disputes and ensures compliance with HMRC, GDPR, and the Data Protection Act 2018.

This guide outlines the essential payroll steps to follow when employment ends, with a focus on accuracy, clarity, and timing.

Key Payroll Tasks to Complete When Ending Employment

1. Confirm the Final Working Date

The official last day sets the stage for payroll, holiday calculations, and HMRC reporting.

Check:

• Contractual notice period
• Any agreed change to notice (documented in writing)
• Whether the employee works their notice or receives PILON

Record the final working date in your payroll system once confirmed. Consistency ensures accurate RTI and P45 reporting.

 2. Gather Pay Information Before Final Payroll

Collect all pay-related items before processing the final run.

Include:

• Basic earnings to the final working date
• Overtime and shift payments
• Approved commission
• Bonuses earned
• Expense reimbursements with receipts
• Salary sacrifice adjustments

Do not enter termination details until all time and earnings entries are approved. Miss timed entries often require payroll reprocessing.

3.Calculate Accrued Holiday

Determine unused holiday to the final working day.

Steps:

1. Review annual leave entitlement
2. Calculate leave taken to date
3. Subtract from accrued entitlement
4. Include the remaining balance in the final pay

If the employee has taken excess leave, deduct only if the contract explicitly allows it.

4. Payment in Lieu of Notice (PILON)

If the employee does not work their notice period, PILON applies.

• Treated as earnings subject to PAYE and NIC
• Statutory redundancy is tax-free up to £30,000
• Enhanced redundancy above £30,000 is taxable

Maintain clear records of the calculation method, date, and supporting policy or agreement.

5. Include Other Pay Elements

Review all remaining items owed:

• Commission tied to invoicing or delivery
• Performance bonuses linked to completed periods
• Call-out or standby payments
• Mileage reimbursements with receipts

Include only payments linked to work already completed.

6. Deduct Outstanding Amounts (If Contractually Allowed)

Recover any amounts owed if the contract permits:

• Training costs subject to repayment rules
• Salary advances or employee loans
• Unreturned equipment where recovery is authorised

Itemise all deductions on the final payslip.

7. Run Final Payroll

Steps:

• Process all earnings and deductions
• Review payroll summary for accuracy
• Validate totals before closing the payroll period

Final pay should follow the usual pay date unless a written agreement states otherwise.

 8. Issue the Final Payslip

The final payslip must clearly show:

• Total pay
• Deductions
• Tax and NIC totals
• Holiday paid out or recovered
• Notice pay, if applicable
• Any redundancy payments

Clarity prevents disputes and supports internal audit requirements.

9. Generate and Provide the P45

After final payroll:

• Mark the employee as a leaver in the Full Payment Submission (FPS)
• Submit RTI to HMRC
• Produce the P45 and give it to the employee

The P45 shows earnings and tax to date, enabling the next employer to apply the correct tax code.

10. Secure Payroll and HR Records

Good record management supports compliance and reduces risk:

• Retain payroll records for at least three complete tax years (HMRC may require up to six for certain items)
• Archive holiday, bonus, and notice calculations
• Record reason for leaving
• Ensure storage is GDPR-compliant

Remove system access once final pay processing is complete to prevent unauthorised access.

11. Avoid Common Errors

High-risk areas to check:

Include an approval step for all final pay calculations to maintain an audit trail.

12. Review Payroll Processes After Business Changes

Adjust routines after:

• Hybrid or remote working arrangements
• Workforce growth
• Payroll platform changes
• New job structures or pay models
• Multiple managers inputting earnings

Even small process improvements can reduce errors and ensure consistency.

Conclusion

Ending employment requires a defined payroll sequence: confirm the final working date, collect all pay adjustments, calculate holiday, apply notice pay, deduct authorised amounts, run payroll, issue payslip and P45, submit RTI, secure records, and remove system access.

Clear, consistent processes protect both employer and employee, maintain compliance, and reduce disputes. Accuracy and documentation are more effective than complexity.

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