How do you process a payment after leaving under 2026/27 UK payroll rules?

Incorrect tax processing for a payment after leaving triggers HMRC compliance interventions immediately, with penalties reaching 70% of unpaid tax for deliberate errors, rising to 100% if the inaccuracy is deliberately concealed. Settling delayed commissions or severance months later by modifying closed payroll records corrupts historical tax data and triggers automated HMRC alerts. To avoid 2026/27 reporting fines, administrators must apply the correct tax code 0T override, redundancy exemptions, and RTI rules when processing late earnings.

What happens when your employment ends in the UK payroll cycle?

The end of the employment payroll cycle requires processing final contractual pay, issuing statutory forms, and closing the employee's live payroll record. This cycle aligns with the contractual payday, ensuring wages and deductions are processed before finalising the Full Payment Submission (FPS).

Operational steps include:

• Calculate and verify all final pay elements, including pro-rata salary.

• Process any outstanding statutory payments or deductions.

• Submit the final FPS to HMRC containing the precise date of leaving.

• Generate and distribute statutory leaving documents to the former employee.

How are calculating final pay, PILON, and accrued holidays handled?

Final pay is calculated by prorating base salary up to the leaving date and adding any Payment in Lieu of Notice (PILON) and accrued but untaken annual leave. To ensure strict compliance when terminating employment contracts, many finance teams use a final pay when leaving a job UK calculator as a quick cross-check against their manual figures before closing the record.

• Prorated salary: Calculate wages owed up to the final active working day.

• Accrued holiday pay: Ensure accrued annual leave pay is treated as standard earnings for PAYE and NICs.

• PILON taxation: Apply standard tax and NIC deductions to all PILON payments under post-2018 HMRC rules (Post-Employment Notice Pay).

• Payroll action: Consolidate these figures into the final FPS submission before generating leaver forms.

⚠️ Warning: Miscalculating PILON or accrued holiday pay can result in unlawful deduction of wages claims, where an Employment Tribunal can order the employer to repay 100% of the financial shortfall.

How do tax-free voluntary redundancy limits compare to taxable severance?

The first £30,000 redundancy exemption applies to genuine redundancy payments, making them tax-free, whereas standard severance elements like Payment in Lieu of Notice (PILON) and holiday pay are fully taxable. Section 401 ITEPA 2003 governs these exemptions, including voluntary redundancy pay. Excess severance amounts attract normal taxation.

What are the rules for P45 generation and RTI submissions?

A P45 must be generated and issued immediately upon completing the final payroll run, coinciding with the leaver indicator on the FPS.

• Final FPS leaving date: Report the exact date employment ceased.

• P45 parts: Distribute Parts 1, 1A, 2, and 3 to HMRC and the new employer.

• One-time-only rule: When closing a payroll record, employers must understand how a P45 form works in the UK and treat it as a strict one-time document that can never be amended or reissued.

💡 Good to know: If an employee leaves without notice, the legal leaving date is the last day actually worked.

How do you manage notice and offboarding documentation?

Employers must formally acknowledge the end of employment notice in writing and prepare the required offboarding documentation before the final payroll cutoff. Notice periods dictate the termination date for PAYE reporting, linking HR processes to final payroll. Clear documentation satisfies HMRC audits, proving termination dates and calculations match contractual agreements.

What must an end-of-employment letter include?

An end-of-employment letter must state the exact termination date, notice period served, and a breakdown of the final pay elements expected. This creates a compliant audit trail concluding the employment. Detailing these elements protects the employer against wage disputes.

• Effective leaving date.

• Final contractual payday.

• Summary of Payment in Lieu of Notice (PILON) and accrued holiday pay.

• Instructions for the return of company property.

How do P45 leaver requirements differ from P60 obligations?

A P45 is issued immediately upon an employee leaving during the tax year, whereas a P60 is only issued to employees actively employed on 5 April. HMRC requires a P45 for mid-year leavers to ensure correct tax calculations for their subsequent employment. Leavers receive no P60 as their data is already finalised on the P45. Reviewing the rules for P45, P60, and P11D forms clarifies these deadlines.

How is a payment after leaving taxed under HMRC rules?

Any payment after leaving must be taxed using the tax code 0T on a non-cumulative basis (M1/W1). This ensures correct tax collection without duplicating personal allowances that the former employee may already be using at a new job. Payroll teams must manually override previous tax settings to apply this to the delayed payment's gross pay.

Why must the 0T tax code be used for a payment after leaving?

The 0T tax code is mandatory because the employee's standard personal allowance is finalised on their P45 and transferred to their new employer. Applying the employee's original tax code instead of the dedicated payment after leaving tax code risks severe under-taxation and subsequent HMRC penalties.

• Code 0T completely removes the tax-free personal allowance from the calculation.

• Payroll teams must actively override the former employee's previous tax code within the software.

• This firm rule prevents the unlawful application of dual allowances across multiple employers.

👉 To note: Scottish taxpayers require code S0T and Welsh taxpayers require code C0T.

How does the M1 or W1 non-cumulative basis prevent under-taxation?

The Month 1 (M1) or Week 1 (W1) non-cumulative basis (M1 / W1) treats the payment as a standalone event, ignoring previous year-to-date earnings and tax paid. It calculates tax solely on the current payment, preventing past allowances from distorting deductions. Operators must flag this in their payroll software to ensure the delayed payment after leaving reports are correctly filed via RTI submissions.

How are National Insurance contributions applied to a payment after leaving?

National Insurance contributions on a payment after leaving depend on the nature of the payment, with standard earnings fully liable and redundancy payments carrying specific exemptions. Class 1 NICs apply using standard thresholds active at the time the payment is actually made. Employers must accurately distinguish between employee deductions and employer NIC liabilities.

When are post-departure bonuses and statutory payments subject to NICs?

Delayed bonuses, commission, and continuing statutory payments remain fully subject to Class 1 NICs based on the statutory rates applicable at the time of payment.

• Bonuses and commission payments are subject to standard Class 1 NICs.

• Statutory Maternity Pay (SMP) continues to attract NICs if paid after employment ends.

• Deductions must be reported on the corresponding Full Payment Submission (FPS).

💡 Good to know: Under official HMRC CWG2 guidance, when calculating Class 1 NICs on an irregular payment after leaving (like a late bonus or accrued holiday pay), payroll operators must apply a weekly earnings period, even if the employee was previously paid on a monthly cycle.

📌 Example: If a former monthly-paid employee receives a £1,000 commission two months after leaving, payroll must apply tax code 0T on a non-cumulative basis (M1 / W1) and process Class 1 NICs using the weekly threshold before submitting data to HMRC.

How do employers process employer-only Class 1A NICs on excess termination payments?

Any portion of a redundancy or termination payment exceeding £30,000 is subject to the 2026/27 employer Class 1A NICs rate of 15%, but remains entirely exempt from employee NICs. This liability triggers immediately when redundancy payments surpass the tax-free statutory threshold.

1. Identify the total value of the termination or redundancy payment.

2. Deduct the £30,000 redundancy exemption limit to determine the excess amount.

3. Apply the 15% employer Class 1A NICs rate to the excess figure.

4. Process and report this employer-only charge in real time via the appropriate HMRC Real Time Information (RTI) submission.

What are the FPS reporting requirements for a payment after leaving?

Employers must submit an FPS detailing the payment while consistently retaining the original leaving date. This RTI flow registers the payment after leaving against an inactive employee. Altering the leaving date to match the payment date corrupts tax records and violates HMRC rules.

How do you flag an irregular payment after leaving the Full Payment Submission?

Processors must use the payment after leaving indicator on the FPS alongside the original payroll ID and leaving date. This signals a subsequent financial addition to a closed record.

• Activate the payment after leaving the indicator in the payroll software.

• Preserve the original leaving date unmodified.

• Use the exact original payroll ID.

• Ensure year-to-date figures reflect only current tax year totals.

What are the record-keeping obligations following a post-leaver payment?

Employers must legally retain all payroll records, including FPS data and P45 copies, for three years from the end of the relevant tax year. This ensures data remains available for HMRC compliance checks. Audit trails support this by storing reconciliation data and tax code evidence.

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