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Payroll When an Employee Leaves (HMRC)

Employers need to deduct and pay the correct amount of tax and National Insurance (and notify HMRC) if any of their employees leave or retire.

Check what you need to do when an employee leaves a company (or retires), how to update payroll, and provide your ex-employee with a P45.

Employers Checklist When Employees Leave

Put the leaving date on their payroll record and make the normal deductions on your next Full Payment Submission (FPS) if an employee leaves.

The process differs if you will be paying your retiring employee a company pension (see further details below).

You must also give a P45 to the employee from your payroll software (or get P45, P60, and other forms from HMRC).

Ideally, you should send a report to HMRC about an employee leaving in the same month that they left for the current tax year.

But, if you need to change something in the next FPS, you would also need to show the leaving date, and:

  • Insert ‘0’ in the field titled ‘Pay and tax in this period’.
  • Add the last reported figures of pay, tax, National Insurance and other payroll information in the field marked ‘Year to date’.
  • Show the ‘Payment date’ as the current FPS payment date (or the final date that you paid the employee).
  • Add ‘H’ (to show you are correcting an earlier payroll report) as the reason for late reporting if the ‘Payment date’ entered is not the current FPS payment date.

What if your employee left in the previous tax year? If so, you should send (either):

  • An Earlier Year Update (EYU) for that particular tax year using your payroll software (or HMRC’s free Basic PAYE Tools).
  • A Full Payment Submission (FPS) for the previous tax year showing the correct year to date information (if supported by your software).

You should update your payroll records with the correct date if you entered the wrong leaving date in your FPS. But, there is no need to report the amendment in your next FPS (to avoid creating a duplicate record).

What if you reported an employee’s leaving date to HMRC in your FPS and then they continue working for you? If this happens, you should:

  • Continue using the same payroll ID if you did not give them a P45. Remove the leaving date from it and do not issue a new start date.
  • Give your employee a new payroll ID if you had previously supplied them with a P45.

Important: Another section provides further guidance on correcting mistakes with pay and deductions (e.g. if you need to correct or adjust previously reported payroll figures).

Paying a Company Pension to a Retiring Employee

Follow these steps if you are still making company pension payments to any of your ex-employees who will retire from the workplace:

  • Do not include their leaving details in your Full Payment Submission (e.g. they are still on payroll).
  • Use a unique payroll ID for the pension payments. The FPS should show that the changed payroll identification (and the previous one).
  • Give the full annual amount of the pension.
  • Use the existing tax code for the employee on a ‘week 1’ or ‘month 1’ basis until HMRC sends you a new code (or use a cumulative basis if the first pension payment falls in the new tax year).
  • Insert ‘Yes’ in the field titled ‘Occupational pension indicator’ for each pension payment.
  • Give the employee a retirement statement that shows their employment details up to the date they actually retired.

You should be deducting tax in the usual way. But, you should not be deducting National Insurance from pension payments if yours is one of the registered schemes with HM Revenue and Customs.

Paying Statutory Maternity or Paternity Pay

As an employer, you must continue to pay any statutory maternity, paternity, or adoption pay until the statutory leave of your employee ends. This rule still applies even if they are no longer working for you.

When paying statutory maternity, paternity or adoption pay, you should (either):

  • Give the employee a P45 once they stop working for you and then use code 0T on a ‘week 1’ or ‘month 1’ basis to deduct tax on the remaining statutory payments.
  • Use your ex-employee’s usual tax code for the statutory payments and then give them a P45 after making the final payment. Remember to record the final payment date as their actual leaving date.

Note: Different tax codes apply for Income Tax in Scotland (e.g. SOT) and Income Tax in Wales (e.g. COT).

Paying an Employee after P45

You may need to pay an employee after giving them a P45 (e.g. they already left your employment). An example could be taxable redundancy pay (above the current threshold). If so:

  • Use tax code 0T on a ‘week 1’ or a ‘month 1’ basis (use the relevant code if they get taxed at the Scottish rate or the Welsh rate).
  • Deduct National Insurance (unless you are making a redundancy payment) and any student loan repayments in the normal way. You should treat it as a weekly payment if it is ‘irregular’ (e.g. accrued holiday pay, an unexpected bonus).
  • Use the employee’s original ‘Date of leaving’ and payroll ID to report the payment and deductions in your next FPS and then set the ‘Payment after leaving’ indicator.
  • Provide written confirmation of the payment that also shows the gross amount and deductions to the employee that left.
  • Add the additional payment in the field titled ‘Year to date’ if the payment falls in the same tax year. If you pay it in the next tax year, the payment should be the only one in the field marked ‘Year to date’.

Important: If you are paying an employee after giving them a P45, they should only get one from you. Another section contains more information on what to do when an employee dies and how to report it.

What to Do if Your Employee Leaves or Retires