This article explains how to terminate an employee’s contract in PayFit, and how the relevant termination payments are calculated.
When an employee leaves your company, they have a legal right to:
Be paid for the worked notice period
Be paid for any unused annual leave
Receive contractual pay such as allowances and benefits up to their leave date
Receive a P45 and a final payslip on or before payday
Employers can deduct any overtaken holiday or overpayments only if it’s stated in the employment contract.
Employers aren’t required to pay unworked notice if this is stated in the contract, or if the employee has breached the contract.
Statutory Minimum Notice Periods
Employees must be given notice before their employment ends. The statutory minimum notice periods are:
1 week’s notice if employed between 1 month and 2 years
1 week per year if employed between 2 and 12 years
12 weeks’ notice if employed for 12 years or more
Employers can give more than the statutory minimum, but never less. Always refer to the employment contract. For further guidance, see ACAS: Notice periods.
PayFit Feature Overview: Contract Terminations
✅ Automatic calculations for payments due, including PILON and holiday pay
✅ Calculated payments can be overwritten if needed
✅ Contract terminations can be edited or cancelled in the month of leaving, or the following month
✅ P45s are automatically issued when running payroll for the month
❌ Cannot finalise a contract termination in a future month
❌ P45s are only generated when running payroll in the leaving month
❌ Contract terminations cannot be processed in bulk
Terminate a Contract
To terminate a contract in PayFit:
Go to the employee’s record → Employment tab
Under Contract, click Terminate contract
Select the reason for leaving and provide relevant dates (notice given, final working day, etc.)
Click Continue to termination payments
Review the calculated payments. Click Overwrite amount to add your own values if necessary
Click Continue
Under Payment After Leaving, choose whether the employee will receive further payments
Optionally, send a reminder to update their login email if the employee uses a work email
Click Save
If recurring payments, deductions, or benefits exist, end these as prompted, then click Save again
After refreshing your browser:
Employee status shows Leaving this month
Contract termination section appears on the Employment tab
Edit or Cancel a Contract Termination
Admins can edit or cancel a termination in the month it was processed, or the following month:
Go to the employee’s record → Employment tab
Under Contract termination, click Edit termination details or Cancel termination
Once payroll is run, termination details are included in the FPS and submitted to HMRC.
Note: HMRC advises against changing an employee’s leaving date, as this can duplicate records and cause discrepancies.
Termination Payments
Payment in Lieu of Notice (PILON)
Calculated if the employee leaves before their contractual notice period ends
You can also choose Give PILON anyway and overwrite amounts if needed
Payment in Lieu of Holiday (PILOH)
PayFit calculates any overtaken or accrued leave automatically
You can overwrite days or amounts if necessary
Redundancy Pay
Statutory redundancy is covered in a separate article: Understanding Redundancy Pay 2025/2026
You can also add occupational redundancy amounts under Contract Termination
Ex-Gratia Payments
A discretionary payment made by an employer with no contractual obligation
Often includes compensation for loss of employment or other discretionary payments
Tax treatment:
The first £30,000 is generally tax- and NI-free
Any amount above £30,000 is taxable for the employee and subject to Class 1A NIC
Contractual payments included in the ex-gratia may be fully taxable
Settlement Payments
Paid to settle a potential claim against the employer
Employees receiving a settlement agreement cannot take an employer to an employment tribunal
May relate to redundancy, but can also apply in other situations
Tax treatment:
The first £30,000 is generally tax- and NI-free
Amounts above £30,000 are taxable for the employee and subject to Class 1A NIC
Any contractual payments or PILON included are fully taxable
Important: PayFit can process statutory redundancy payments as long as the employee’s contract and payroll setup are correct. However, we cannot provide support with termination calculations, due to the complexity and individuality of employee contracts, notice periods, and other entitlements. For guidance on occupational redundancy pay, eligibility, or employment rights, please consult a legal advisor or employment specialist.