Final Pay When Leaving a Job UK

Final pay is one of the most sensitive parts of the employment relationship. When someone leaves a job, the employer must ensure their final wages, holiday pay and any outstanding contractual payments are calculated accurately and paid on time. Errors lead to avoidable disputes, grievances and, in some cases, claims for unlawful deduction from wages. For HR professionals and business owners, the challenge is ensuring that statutory rights, contractual terms and payroll processes all align so that the employee receives exactly what they are legally owed when their employment ends.

The rules around final pay are not always straightforward. The Employment Rights Act 1996 sets boundaries for lawful deductions, while contractual notice provisions determine what should be paid during or in lieu of notice. Entitlement to holiday pay, bonus schemes, commission arrangements and training cost repayments all sit alongside these statutory rights. When these elements are not understood or applied consistently, employers face financial and legal risk, particularly if any part of the final pay is withheld or delayed. Where the contract is silent about timing, the date on which employees are normally paid under established payroll practice can itself become an implied term, so late payment against that pattern may expose the employer to unlawful deduction claims.

What this article is about: This article provides a complete UK employment law guide to calculating and issuing final pay when an employee leaves. It explains what must be paid, when it must be paid, which deductions are lawful, how notice and holiday pay interact, and the payroll steps HR teams should follow to stay compliant. It is written for HR professionals and business owners who need an authoritative, practical resource they can rely on when handling departures and processing final payroll.

Section A: Legal Framework for Final Pay

Ensuring compliant final pay starts with understanding the legal framework that governs what an employer must pay when an employee leaves. HR professionals and business owners need a clear view of the statutory rules under the Employment Rights Act 1996, the contractual obligations that sit alongside those rules, and the liability that arises if an employee is not paid correctly. This section sets out the core legal principles that determine when final pay is due and what must be included.

1. Statutory requirements for final pay

Under section 13 of the Employment Rights Act 1996 (ERA 1996), employees are entitled to be paid the wages they have earned, including their final wages, without unlawful deduction. A deduction is lawful only if it is required by statute, agreed in the employment contract or authorised in writing by the employee. This means that when an employee leaves, their final salary, holiday pay and any other contractual payments must be paid in full unless a lawful deduction applies.

There is no statutory rule that final pay must be issued on the employee’s last working day. Instead, final pay must be paid no later than the employee’s normal contractual payday. If the payroll deadline is missed, the employer must still ensure payment is made promptly to avoid the risk of grievance or dispute. Failure to pay wages on the contractual payday can amount to an unlawful deduction even if the employer intends to process the payment in the next payroll cycle.

Employees have the right to bring an unlawful deduction claim to an employment tribunal under section 23 ERA 1996. Claims must generally be brought within three months of the alleged deduction, subject to the ACAS Early Conciliation process.

2. Contractual terms and notice periods

The employment contract plays a central role in determining what the final payment should include. Contractual notice provisions set out the period of notice required and whether pay continues during that period. Employers may require employees to work their notice or may place them on garden leave if the contract allows.

Some contracts permit payment in lieu of notice (PILON). Where PILON is exercised, the employee is paid the salary they would have earned during the notice period. PILON must be clearly drafted to avoid disputes over whether benefits should be included. Since the post-2018 reforms, all PILON is treated as general earnings and is taxable and subject to National Insurance. Where a PILON clause is unclear, the payment may instead be treated as damages for breach of contract, which can alter the calculation.

Contractual terms also shape entitlement to bonuses, commission, overtime and other variable earnings. HR teams must review the contract and any linked policies to identify which payments remain due on termination.

3. Common employer risks and liabilities

Failing to issue correct final pay, or delaying payment, creates legal exposure. The main risks include:

• Unlawful deduction from wages claims under section 13 ERA 1996 where an employer withholds pay without contractual or statutory authority.
• Breach of contract claims if the employer fails to honour contractual notice pay, bonus provisions or other terms.
• Holiday pay disputes, especially where normal remuneration is not used in line with case law such as Williams v British Airways and Lock v British Gas.
• Disputes over deductions for unreturned property, particularly where the deduction is not clearly authorised in the contract.

Employers must also be aware that withholding final pay to compel the return of equipment is unlawful unless the deduction is expressly permitted by contract or written agreement.

A further risk is that longstanding payroll custom and practice can create implied terms about payment dates, exposing employers to unlawful deduction claims if final pay deviates from established patterns.

Section Summary: The legal framework for final pay is built on statutory rights under the ERA 1996 and the contractual terms governing notice, pay and deductions. Employers who fail to follow this framework face claims for unlawful deduction, breach of contract and holiday pay disputes. A compliant process starts with understanding the statutory rules, reviewing the contract and identifying all lawful elements of final pay.

Section B: What Final Pay Must Include

When an employee leaves, the employer must identify every element of pay owed up to the last working day and process it correctly through payroll. This means reviewing statutory entitlements, contractual terms and any variable pay schemes to ensure nothing is omitted. HR and payroll teams must take a methodical approach, as mistakes often arise where entitlement relies on accurate record-keeping or where pay is calculated over reference periods. This section explains each component that typically forms part of final pay and outlines how employers should assess entitlement.

1. Salary or wages owed up to the last working day

The starting point is payment for all work performed up to the employee’s final day. If the employee works part of a month, the employer must calculate salary pro-rata based on the organisation’s payroll method. Most employers calculate this using either calendar days or working days, and the approach must be consistent with internal payroll policy.

Hourly staff must be paid for all hours worked, including any overtime already earned. Employers should ensure timesheets are completed and approved promptly so payroll can issue final pay on time.

2. Accrued but untaken holiday pay

Under the Working Time Regulations 1998, employees are entitled to be paid for any statutory holiday they have accrued but not taken by the time they leave. Statutory leave cannot be replaced by payment except on termination. This entitlement includes any contractual holiday that exceeds the statutory minimum if the employment contract provides for such payment. Rolled-up holiday pay is unlawful, meaning employers must calculate holiday pay separately and accurately.

Holiday pay must reflect the employee’s “normal remuneration”, as established by case law including Williams v British Airways and Lock v British Gas. For employees with variable hours, the calculation requires a 52-week reference period. Employers should also account for holiday accruing during statutory maternity leave and other forms of statutory family leave, even where these periods are unpaid.

3. Notice pay or PILON

If the employee works their notice period, they must be paid as normal until the final day of employment. Where the employer elects to terminate employment immediately and pays the employee in lieu of notice (PILON), this payment must reflect the full salary and contractual benefits the employee would have received if they had worked their notice.

PILON must be processed through payroll and is taxable in full under the post-2018 reforms (Finance Act 2017). Any ambiguity in the PILON clause may lead to the payment being treated as damages for breach of contract, which can alter the calculation.

4. Bonuses, commissions and overtime

Final pay may also include outstanding variable pay. Whether a bonus or commission payment is due depends on the contractual wording and any scheme rules.

• Contractual bonuses must be paid if the employee has met the criteria.
• Discretionary bonuses may be withheld, but the employer must act in good faith and avoid discriminatory reasons for exclusion, consistent with case law such as Clark v Nomura and Hatt v Marriott.
• Commission may remain payable if the work generating that commission was completed before termination. In some cases, commissions earned but not yet invoiced may also be payable depending on the contractual trigger.

Employers should review scheme rules carefully to determine whether entitlement survives termination.

5. Expense reimbursements

Employees remain entitled to reimbursement of authorised business expenses incurred before leaving. Employers should ensure departing employees are reminded to submit outstanding claims promptly. Any internal deadlines for submitting expenses should be applied consistently, but employers must avoid withholding legitimate business expenses simply because a claim is submitted near the termination date.

Section Summary: Final pay is more than the last salary payment. It can include holiday entitlement, notice pay, variable pay, expenses and other contractual payments that accrued before termination. Employers should take a systematic approach by reviewing the employment contract, holiday records and any bonus or commission schemes to ensure all entitlements are captured in the final payroll run.

Section C: Lawful Deductions from Final Pay

Employers often need to make deductions from an employee’s final pay, but these deductions must comply strictly with UK employment law. The starting principle under the Employment Rights Act 1996 is that deductions are unlawful unless they fall within one of three categories: required by statute, authorised by the employment contract or agreed in writing by the employee. HR teams must ensure that every deduction is justified, documented and communicated clearly to avoid complaints or legal challenge. This section explains the lawful bases for deductions and how common scenarios should be managed.

1. Overpayments

Employers have a statutory right to recover wage overpayments, including errors relating to salary, overtime, sick pay or holiday pay. While consent is not required to recover an overpayment, employers must act reasonably and avoid creating financial hardship. A tribunal may consider whether the manner of recovery was oppressive, even though recovery itself is lawful. Best practice is to inform the employee in writing, explain the basis of the overpayment, provide calculations and, where the deduction would absorb most or all of the final pay, offer a repayment plan instead of a single deduction.

Where the overpayment is historical and substantial, the employer should consider whether recovery may be challenged on the grounds of estoppel, although this is uncommon in straightforward payroll-error cases.

2. Repayment of training costs

Employers often seek to recover training costs when an employee leaves within a certain period. Recovery is lawful only where: (i) a valid and clearly drafted training agreement exists, and (ii) the repayment provisions are reasonable and proportionate. Deductions must also comply with the Consumer Rights Act 2015 fairness test, even in employment contracts. The agreement must set out the amount repayable, the timescale for repayment and how the repayment reduces over time if the employee remains in employment. Deductions for training costs must not exceed the actual cost incurred and must avoid operating as a penalty. If the agreement is unclear or overly punitive, the employee may dispute the deduction.

3. Company property not returned

Employers can deduct the value of unreturned property—such as laptops, tools, uniforms or access cards—only if the employment contract expressly permits this. Without contractual authority, the deduction will be unlawful even if the employee has failed to return the property.

Employers should ensure that:

• the contract gives clear authority for deductions,
• the value of the deduction reflects the actual loss rather than an estimated value, and
• the employee has been given reasonable opportunity to return the property.

Withholding final pay in full until property is returned is not lawful unless the contract expressly permits such withholding.

4. Holiday taken in excess of accrual

If an employee has taken more holiday than they have accrued by the termination date, employers can deduct the value of the excess holiday. This deduction is lawful under the Working Time Regulations 1998 provided the employment contract permits deduction of excess holiday pay.

If the contract does not allow deductions, the employer must recover the overpayment outside payroll, usually through a civil debt claim. Accurate holiday records and clarity on the leave year are essential to support the calculation.

Section Summary: Deductions from final pay must always be lawful, justified and clearly communicated. The employer’s safest approach is to rely on express contractual authority and provide transparent calculations to the employee. Common deductions—such as recovery of overpayments, training costs, unreturned property and excess holiday—are lawful only when contractual or statutory criteria are met. Poorly handled deductions expose employers to unlawful deduction claims and unnecessary disputes.

Section D: Payroll Process, Timing and Documentation

Final pay is not only a legal obligation but also a key part of an employer’s payroll and HR process. When an employee leaves, the organisation must ensure that pay is calculated correctly, processed within the required timescale and accompanied by the correct statutory documentation. Delays or omissions often lead to grievances and reputational damage. This section sets out the payroll, timing and communication requirements employers must follow to remain compliant and avoid unnecessary disputes.

1. When final pay must be issued

There is no statutory requirement to pay final wages on the employee’s last working day. Instead, final pay must be issued no later than the employee’s normal contractual payday. While employers may process payment in the next payroll cycle if the employee leaves after the payroll cut-off date, they should avoid doing so if it results in late payment unless the contract expressly allows for this.

Failure to pay wages on time can amount to unlawful deduction under the Employment Rights Act 1996. Employers should therefore plan ahead, ensuring that notice periods, holiday records, commission calculations and expense claims are processed promptly.

2. Providing the final payslip

Under the Employment Rights Act 1996, employees are entitled to an itemised payslip that clearly sets out earnings and deductions. This applies equally to final pay. The final payslip should clearly show:

• salary or wages to the final working day
• holiday pay
• notice pay or PILON
• bonuses, commission or overtime
• expenses
• statutory and voluntary deductions
• any contractual deductions, such as for training costs or unreturned property

Digital payslips are legally compliant provided employees can access and retain a copy. Providing a clear breakdown reduces the risk of disagreement and supports accurate record-keeping.

3. P45 requirements

A P45 must be issued when an employee leaves employment. This is a statutory obligation and ensures the employee can provide correct tax records to their next employer. Employers must:

• issue the P45 after final pay has been processed
• ensure the form includes accurate pay and tax figures for the tax year up to the final payment, not only to the leaving date
• send the relevant RTI submission to HMRC through payroll software

Most payroll systems issue the P45 automatically once the leaving date and final pay have been entered.

4. Communication with the departing employee

Clear communication is essential in avoiding disputes. Employers should confirm in writing:

• the employee’s final working day
• their notice period and how it has been treated
• details of all payments included in final pay
• a breakdown of holiday calculations
• any lawful deductions and supporting calculations
• arrangements for returning company property
• when the P45 will be issued

Where an employee raises concerns about their final pay, employers should respond promptly and provide supporting evidence. A transparent approach reduces conflict and demonstrates good HR practice.

Section Summary: A compliant payroll process ensures that final pay is issued on time, accompanied by the correct documentation and communicated clearly to the departing employee. Employers who follow a consistent procedure minimise the risk of unlawful deduction claims, payroll disputes and administrative errors.

FAQs

How soon must an employee be paid after leaving?
Final pay must be issued no later than the employee’s normal contractual payday. Employers may pay earlier as a matter of good practice, but they are not legally required to pay on the final working day.

Can an employer withhold final pay?
No. Withholding pay is unlawful unless a deduction is permitted by statute, authorised by the employment contract or agreed in writing by the employee. Withholding final pay to compel the return of company property is unlawful unless the contract expressly allows it.

Does an employee always get holiday pay when leaving?
Yes. Employees must be paid for any accrued but untaken statutory holiday. This also applies to enhanced contractual holiday if the contract provides for payment on termination.

Do bonuses have to be paid after resignation?
Contractual bonuses must be paid if the employee has met the criteria. Discretionary bonuses may be withheld, but employers must act fairly, in good faith and avoid discriminatory reasons for exclusion.

Can notice be unpaid?
Notice must be paid unless the employee is dismissed for gross misconduct or the employee resigns without giving proper notice and the employer does not waive the breach. Otherwise, employees are entitled to paid statutory or contractual notice. Payment in lieu of notice (PILON) may apply where the employer ends employment immediately.

Can an employer deduct the cost of unreturned equipment?
Only if the employment contract contains a clear deduction clause. Without contractual authority, the deduction is unlawful even if the employee fails to return company property.

Conclusion

Final pay is a critical point in the employment relationship, and errors can create avoidable legal and financial risk for employers. By understanding statutory rights under the Employment Rights Act 1996, reviewing contractual terms carefully and applying clear internal processes, HR teams can ensure that every element of pay owed to a departing employee is handled correctly. This includes salary up to the last working day, accrued holiday, notice pay, variable pay, expenses and legitimate expense claims.

Employers also need to take care when making deductions. Only deductions authorised by statute, the employment contract or written employee agreement are lawful. Missteps in this area are a common source of unlawful deduction claims. A transparent approach, supported by accurate calculations and well-structured communication, helps resolve issues quickly and minimises disputes.

Where disagreements arise, ACAS Early Conciliation is the first required step before a tribunal claim. Addressing issues early and openly reduces the risk of litigation and demonstrates professional HR practice.

A consistent payroll and communication process ensures final pay is issued on time, documented correctly and fully understood by the employee. For HR professionals and business owners, getting this right protects the organisation from claims, strengthens compliance and supports a fair and professional approach to employee departures.

Glossary

Useful Links