How to Process a Leaver: Final Pay, P45, and Outstanding Holiday

When an employee leaves—whether through resignation, dismissal, redundancy, or contract end—you need to process their final pay correctly. Getting it wrong is one of the most common sources of employee complaints and occasional tribunal claims (the sort you don't want).

Specifically, when you process a leaver's final pay and outstanding items, you're juggling several moving parts: pro-rata salary, accrued holiday, notice pay, tax documentation. Most disputes come down to one thing: holiday pay. Either you've forgotten to pay for days they didn't take, or you've deducted holiday they thought was earned. Both happen often. Both are avoidable.

Let's walk through it.

Before you process the leaver

As soon as you know someone is leaving, gather this information:

Leaving date: The exact date. This anchors everything—how much of the final pay period they're owed, when benefits end, when to remove them from payroll.
Outstanding holiday: Calculate how much they've accrued but not taken. This is the figure that lands you in disputes if mishandled.
Notice period: Are they working it out? Being paid in lieu (PILON)? On garden leave? This changes their final pay calculation.
Expenses owed: Any approved claims you haven't reimbursed. Reimburse these through payroll as part of their final payment.
Deductions you're entitled to make: Overpaid holiday (if the contract allows), outstanding loans, training costs, unreturned equipment—but only if the contract explicitly permits each one.
Company property: Keys, cards, equipment. Not payroll, but confirm it's being returned.

Gather this early. Don't scramble on their last day.

Calculate final salary, holiday, and notice pay

Final salary (pro-rata)

If they leave mid-month, calculate their pay pro-rata:

Pro-rata pay = (Annual salary ÷ 365) × Calendar days worked

Or more commonly:

Pro-rata pay = (Monthly salary ÷ Working days in month) × Days actually worked

For hourly staff: hours worked × hourly rate, including any overtime or shift premiums.

Outstanding holiday (the complexity most miss)

This is where disputes live. You need to compare:

How much they've accrued: Annual entitlement × (Months worked in holiday year ÷ 12)
How much they've taken: Their actual holiday days used

Compare the two:

Accrued > taken: They have untaken days. You must pay them. This is not optional.
Taken > accrued: They've used more days than earned. Your contract may allow you to deduct the overpayment. If not, you can't recover it. (Which is why every employment contract should include a holiday-deduction clause from day one.)

Payment for untaken holiday is at their normal daily rate. For variable-hours staff, use the average over the relevant period. Show this as a separate line on the final payslip.

Notice pay

How you handle notice affects final pay:

Working their notice: They work normally. Pay as usual up to their last day.
Garden leave: They don't attend but remain employed and paid. Process as if working.
Payment in lieu of notice (PILON): They leave immediately; you pay a lump sum for the notice period. Tax treatment: if the contract includes a PILON clause, it's treated as earnings (taxed and subject to National Insurance). If there's no PILON clause, tax treatment differs—consult your accountant if unsure.

Bonuses, deductions, and tax treatment

Bonuses and commission

If they're due a bonus or commission for work already completed, include it in final pay. First, check:

Does the contract entitle them if they leave before payout?
Is it pro-rated based on time worked?
Is there a "good leaver / bad leaver" clause?

These are subject to normal tax and social contributions. For businesses with multiple pay frequencies or variable commission structures, clarify the calculation method in your payroll policy upfront.

Permitted deductions

You can deduct from final pay only if the contract explicitly allows it and the employee has agreed. Common deductions:

Overpaid holiday (if permitted by contract)
Outstanding employee loans (if the loan agreement allows)
Training costs (if the contract includes a clawback clause for early departure)
Unreturned equipment (if explicitly authorised in the contract)

Unauthorised deductions = unlawful deduction of wages claim at an Employment Tribunal. Check ACAS guidance on deductions from pay. Always verify your contract and be clear on the payslip.

Run final payroll and issue documentation

Process the final pay through your normal payroll:

Pro-rata salary
Outstanding holiday pay
Notice pay or PILON
Bonuses or commission
All deductions (tax, National Insurance, pension, permitted deductions)

The payslip should itemise everything—employee should see exactly what they're receiving and why.

Documentation required:

Final payslip: All payments and deductions clearly shown.
P45: The UK tax form showing year-to-date pay and tax. HMRC requires this when someone leaves. Full details on gov.uk.
Pension information: What happens to their contributions and pension pot.
Benefits documentation: When coverage ends; whether they can continue any schemes.
Reference letter (optional but expected).

Issue these on or before their last day.

System updates (after final pay processes):

Mark as leaver in payroll system
Remove from future pay runs (critical—or they'll be overpaid next month)
Tell your pension provider to stop contributions
Cancel benefits and subscriptions
Archive payroll records (keep 6 years in the UK)
Report the leaver to HMRC through your regular pay submission

Most payroll software automates this when you process a leaver, but double-check.

Redundancy payments (if applicable)

If they're being made redundant, additional payments may apply:

Statutory redundancy pay: Calculated by age, length of service, and weekly pay, capped at a statutory limit. Use the GOV.UK redundancy calculator for current figures. See also our guide to calculating redundancy pay.

Enhanced redundancy: Contractual or discretionary payments above statutory.

Tax treatment: Statutory redundancy is tax-free. Enhanced redundancy is also tax-free up to £30,000 (in the UK); anything above is taxable. Show these separately on the payslip.

Frequently Asked Questions

Q: Can I deduct overpaid holiday from their final pay? A: Only if the employment contract explicitly permits it. If there's no deduction clause, you cannot recover overpaid holiday—even if they took days they hadn't accrued. Ensure every new contract includes this clause.

Q: What if they don't return company equipment? A: You can deduct the value only if the contract explicitly authorises deductions for unreturned property. Otherwise, pursue them separately or write it off. Add this clause to all contracts.

Q: Is payment in lieu of notice (PILON) taxable? A: If the contract includes a PILON clause, yes—it's earnings and subject to income tax and National Insurance. If there's no clause, tax treatment differs—check with your accountant.

Q: When must I issue the P45? A: Within 14 days of their last day. Late P45s delay their next employer's onboarding.

Q: Do I have to pay for unused holiday if they're dismissed for gross misconduct? A: Yes. You must pay for accrued holiday regardless of the reason for dismissal, including gross misconduct. The only exception is a contractual waiver (rare and risky). See ACAS guidance on holiday pay.

Q: How long must I keep payroll records? A: Typically 6 years in the UK. Keep final payslips, P45s, and supporting documentation.

Q: What's the most common mistake when processing leavers? A: Forgetting to pay untaken holiday or deducting overpaid holiday without contractual authority. Both trigger complaints and claims. Use a checklist: calculate accrued holiday, verify the contract before deducting, and confirm on the payslip.

Common mistakes and how to avoid them

Forgetting untaken holiday: The most frequent error. It triggers complaints and claims. Ensure your checklist includes "Calculate and pay accrued holiday."
Deducting without contractual authority: You'll be challenged. Always check the contract first.
Late P45 issuance: Frustrates the employee and their next employer. Treat it as same-day work.
Incorrect PILON tax treatment: If unsure, ask your accountant. Getting this wrong triggers compliance issues.
Failing to remove from payroll: They'll be paid again next month. Remove them immediately after final pay runs.
Not updating the pension provider: Contributions continue unless you explicitly stop them.

Processing a leaver is detail-heavy—holiday calculations, tax forms, permission checks, system updates. But it's straightforward with a checklist: gather info early, calculate accurately, issue documentation promptly, and communicate clearly.

Payroll platforms like Relentify automate the heavy lifting: calculating outstanding holiday, generating itemised final payslips, producing the P45, and flagging system updates (pension, benefits, future pay runs). When HR, payroll, and accounting live in one place, processing a leaver is a single workflow, not six disconnected tasks across different tools.

A clean separation protects both you and the employee.