When an employee leaves or retires

This guide explains the PAYE procedures you need to follow if one of your employees leaves your business or retires. You'll also find information relating to PAYE tax and National Insurance contributions (NICs) on payments made to an employee who is leaving your employment.

This guide does not cover what to do if an employee or pensioner dies. For further information about that, please follow the link below.

If an employee or pensioner dies

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Important news and updates

Once you start reporting your PAYE information in real time you won't be able to submit forms P45 and P46 via HM Revenue & Customs' (HMRC's) Online Service - this is because you must tell HMRC about people who've started working for you, or left, using your real time submissions (Full Payment Submissions, or FPS) through your payroll software.

If you've been notified that you must start reporting PAYE in real time from April 2013, if you try to send P45s or P46s via HMRC's Online Service, they will be rejected so you need to take the following action:

For employees who left your employment in 2012-13:

  • instead of submitting a P45 you must enter the leaving date on the employee's 2012-13 P14
  • if you've already submitted their P14 for 2012-13, with your form P35, without showing a leaving date take no further action
  • do not include the employee on your first FPS or Employer Alignment Submission (EAS)
  • once HMRC processes your first FPS or EAS the employee's period of employment will show as having ended on 5 April 2013
  • do not submit a revised P14

For employees who started in your employment in 2012-13:

  • include details of the employee in your first FPS (or EAS if you send one)

Read the rest of this guidance to find out how to let HMRC know about employees who've left since you started reporting PAYE information in real time.

When an employee leaves

When someone leaves your employment, you must include the date of leaving on the Full Payment Submission (FPS) when you make their final payment. You must also give the employee a form P45.

Updating the employee's payroll record

Whether you are using a commercial payroll package or HMRC's Basic PAYE Tools, the only change you need to make is to enter the employee's leaving date. For details on how to do this, check the user guide for your payroll software or ask your provider for more details.

Late amendments

If an employee who has left your employment changes their mind, or you mistakenly take an employee off the payroll and have already notified HMRC on an FPS, you should continue making payments using the same Payroll ID and submit an FPS - but do not enter a new start date.

You cannot use this method if you have given the employee a P45 - in this case you will need to make the employee a new starter and give them a different Payroll ID. Do not include their previous earnings and tax deducted to date on the FPS. 

Late notifications

If an employee leaves your employment, but it does not become apparent until some time later, you should:

  • include them on the next FPS
  • show the actual leaving date
  • enter zeros in the pay and tax in this period field
  • enter the last reported figures of pay, tax, NICs and so on in the year to date field
  • show the payment date as the last date the employee was paid

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When an employee retires

When an employee retires, what you need to do depends on whether or not you'll be paying them a pension.

You won't be paying the employee a pension

If an employee retires and you're not going to be paying them a pension, you need to include the leaving details on the FPS when making their final payment, as you would for any employee who's leaving - see the earlier section in this guide 'When an employee leaves'.

You will be paying the employee a pension

(a) Pension payments to employees not continuing in employment

If you're going to be paying a pension to a retiring employee, you don't need to include the leaver details. As you'll carry on paying them, HMRC treats that employee as not having left your payroll.

When you start to pay the pension, use the employee's existing tax code on a week 1/month 1 basis until you hear from HMRC. If HMRC has not contacted you by 5 April (or the employee retires so late in the tax year that the first pension payment is made after 5 April) carry forward the existing tax code to the new tax year, but use it on a cumulative basis.

When you make the first pension payment set the Occupational Pension indicator and include the annual amount of the occupational pension on the FPS. You must also set this indicator for every subsequent payment of occupational pension (including annuity) you pay to them.

Give the former employee a retirement statement showing their previous employment details up to the date of their retirement.

You must use a different Payroll ID for the pension payments and indicate on the FPS that the Payroll ID has changed, including details of the previous Payroll ID.

For more details, follow the link at the end of this section to HMRC's guide on 'Pension and annuity payments and PAYE'.

(b) Pension payments to employees continuing in your employment

Before you start to make pension payments to an employee continuing in employment with you, you should set up a separate payroll record.

When you start to pay the pension, you should use code 0T on a week 1/month 1 basis on the employee's pension payment and continue to use the same code as before on the employment income.

When you make the first pension payment you must include the annual amount of the occupational pension on the FPS and set the Occupational Pension indicator for the first and every subsequent payment of occupational pension (including annuity) you pay them.

You must use a different Payroll ID for the pension payments on the FPS from that used for their employment income.

Pension and annuity payments and PAYE

Sending payroll information to HMRC

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PAYE tax and NICs on payments to an employee who's leaving

Payments to an employee who is leaving or retiring are treated differently, depending on whether they count as standard payments (for example salary, wages, holiday pay and bonuses) or one-off payments (including redundancy payments and retirement lump-sums).

PAYE tax on standard payments

In most cases you must work out, record and deduct PAYE tax as usual on any standard payments you make to your employee, include any leaving details on your final FPS and make sure you give the employee a P45.

Payment after leaving: For any further payments made after you have given the employee a P45 - including share-based payments - complete the following steps:

  • Deduct PAYE tax using code 0T on a week 1/month 1 basis.
  • Enter this as the amended code, including the payment and the PAYE tax and NICs you've deducted on the employee's payroll record.
  • Include this additional payment and the tax deducted on the FPS and in the pay and tax in this period - ensure the revised year to date figures include the additional payment. If you make a payment after leaving in a subsequent tax year the year to date figures on the FPS should only reflect the additional payment.
  • Give the employee a letter showing the date of the payment, the gross amount, and the PAYE tax you have deducted and confirmation that the payment is a post-leaving payment.
  • Include the details, set the 'Payment after leaving' indicator and show the original date of leaving on the FPS when you make the payment. You must not give the employee another P45.

NICs on standard payments

If you make a final standard payment to an employee at the time they leave your business you must calculate, record and deduct NICs in the normal way. Don't forget to include the date of leaving on the final FPS when you make the final payment.

Payment after leaving: If you make the payment after the employee leaves, then the NICs treatment depends on what the payment includes:

  • wages or salary - work out the NICs due using the normal earnings period and National Insurance category letter, and the contribution rates and limits current at the time of payment
  • irregular payment (such as an unexpected bonus or accrued holiday pay) - use the usual rates, limits and National Insurance category letter but with a weekly earnings period

Remember to include the details, set the 'Payment after leaving' indicator and show the original date of leaving on the FPS when you make the payment.

For more help, please see the HMRC publication CWG2, 'Employer Further Guide to PAYE and NICs' using the link at the end of this section.

PAYE tax and NICs on one-off payments (including redundancy)

Different types of one-off payments to employees leaving your business are treated differently, and separate rules apply for working out the PAYE tax and NICs due. For NICs purposes, one-off leaving payments are either wholly liable to NICs or not liable at all. Unpaid salary and holiday pay are treated as earnings for the purposes of tax and NICs.

Some types of leaving payment are tax-free, some taxable in full, and some taxable only above £30,000. Most redundancy payments are tax-free up to £30,000 and not liable for NICs.

For a list of the PAYE tax and NICs rules covering the most common types of one-off leaving payments, read the HMRC publication CWG2, 'Employer Further Guide to PAYE and NICs'.

There's more information about redundancy on the GOV.UK website - see the link at the end of this section.

For any one-off payments where you have shown the date of leaving on a previous FPS - complete the following steps:

  • Deduct PAYE tax using code 0T on a week 1/month 1 basis.
  • Calculate NICs if appropriate.
  • Make sure the year to date figures on the FPS only reflect the one-off payment.
  • Give the employee a letter showing the date of the payment, the gross amount, and the PAYE tax you have deducted.
  • Set the pay frequency as 'one-off' on the FPS when you make the payment. You must not give the employee a form P45.

Download CWG2, 'Employer Further Guide to PAYE and NICs (PDF 1.8MB)

Making staff redundant on the GOV.UK website (Opens new window)

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