Xero Payroll – How to Pay Out Annual Leave on Termination

When an employee leaves your business you may need to pay out their unused annual leave balance. In this tutorial, I will show you how to cash in the annual leave accrued for an employee in Xero’s demo company.

Set Employee’s Termination Date

The first thing we need to do is set the termination date for your employee:

  1. Go to Payroll → Employees in the main menu.
  2. Choose Odette Garrison.
  3. Click on the Employment tab.
  4. Click on the Options button at the top right hand side of your screen.
  5. Choose Set termination date from the drop down menu. Using the calendar in the Termination date field, choose your employee’s last working day. For the purposes of this tutorial, choose a date about four days ahead of the current date. I have entered 17-July-2018.
  6. Press Save when ready.

Set Leave to be Paid Out on Termination

Next, we need to set Odette’s employee profile up so her annual leave will be paid out on termination:

  1. Click on the Leave tab.
  2. Click on the number of Annual Leave hours accrued.
  3. In the popup box, go to the On termination unused balance is: field and choose Paid Out.
  4. Click on Save when finished.

Choose the Pay Run

Now we need to process the pay run that will include Odette’s final pay:

  1. Go to Payroll → Pay Employees in the main menu.
  2. Click on + Add Pay Run.
  3. Select the pay run that will include Odette’s final pay. 

Set up the Pay Template

Once you have started the pay run you must set up Odette’s pay template to include her annual leave pay out:

  1. Click on Odette Garrison to go into her pay template. At this point her annual leave pay out will not be included.
  2. Scroll to the bottom of the template and click on Set as Final Pay.
  3. In the popup box, choose the correct Termination date which in this case is 17-July-2018.
  4. There are other options that you can change if appropriate for your employee, but for this exercise we will leave them as they are so press Save when ready.

Check the Pay Template

Once you have completed the steps above you should see a message at the top of Odette’s pay template and few more pay lines:

  • Leave Type: Annual Leave (Final Pay).
  • Tax Type: tax on unused leave.

Now save the template and post the pay run to complete Odette’s annual leave pay out. Check that her annual leave balance is nil by going to Payroll → Employees → Odette Garrison → Leave.

How to Cancel a Final Pay

If you have made a mistake or you want to cancel a final pay for any other reason, simply press the Clear Final Pay button at the bottom of the employee’s pay template before you post the pay run.

Disclaimer: Our articles and videos are here to inform you and the information provided does not constitute financial, taxation, legal, business or other professional advice and should not be relied upon as such. See our full disclaimer here.

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