How do we decide which tax code to use from form P45?Tuesday, July 13th, 2010
One of the basic principles of PAYE is that, when an employee moves from one employer to another, the tax code used by the previous employer is also used by the new employer. However, that is not always possible.
Form P45 is completed by an employer when an employee leaves and has four separate parts.
- Part 1 is filed online (although, until the end of the 2010/11 tax year only, employers with fewer than 50 employees may optionally send a paper copy to their tax office).
- Parts 1A, 2 and 3 are given to the employee.
- Part 1A is retained by the employee and used, if necessary, for completing a tax return.
- Parts 2 and 3 are given by the employee to the new employer.
- Part 2 is retained by the new employer for record purposes
- Part 3 is filed online by the new employer (although, until the end of the 2010/11 tax year only, employers with fewer than 50 employees may optionally send the paper Part 3 to their tax office).
Form P45 is available in various versions for completion manually or by laser or continuous printers, as
- a four-part paper document, for use by employers who submit a paper Part 1
- a three-part paper document, for employers who file Part 1 online.
When a new employee provides Parts 2 and 3 of a P45, the new employer has to decide which tax code to use. Unless one of the situations described in the sections below applies, the new employer should simply use the tax code that the previous employer has entered on the P45 at item 6. If the P45 shows an ‘X’ against the tax code, the new employer must apply the tax code on a W1/M1 basis.
There are two situations where the new employer has to use a different tax code to that used in the previous employment:
- where the P45 was issued by the previous employer in a tax year prior to the current tax year, or
- where changes have to be made to tax codes as a result of Budget announcements in March or April.
P45 issued in an earlier tax year
(As there was no change to the Emergency tax code from 6 April 2010 – it was 647L in both the 2009/10 and 2010/11 tax years – the following section is written, to illustrate the procedures, as if the current tax year is 2011/12. The Emergency tax code in 2011/12 is 747L.)
Increases to tax codes, to reflect the annual increase in tax allowances, normally take effect from 6 April each year. In the case of tax codes ending in ‘L’, the increase to the tax code is applied by the employer, following instructions provided in advance by HMRC on form P9X and in Helpbook E12 (found on the Employer CD-ROM issued to employers in February each year). For example, from 6 April 2011, all ‘L’ tax codes are increased by 100 points, e.g. from 647L to 747L, 339L to 439L, etc. Tax codes ending in a letter other than ‘L’ are changed individually by HMRC by sending P9 coding notices to the employer.
With that understanding in mind,
- if an employee starts on or after 6 April and presents a P45 showing a leaving date in a tax year earlier than the previous year (e.g. the current tax year is 2011/12 and the leaving date on the P45 is before 6 April 2010), the Emergency code (747L for 2011/12) must be used, on a W1/M1 basis.
- if an employee starts up to 24 May and presents a P45 showing a leaving date in the previous year (e.g. the current tax year is 2011/12 and the leaving date on the P45 falls within the 2010/11 tax year), the code shown may be used, after applying the adjustment described in (1) above if it is an ‘L’ tax code. Any W1/M1 indicator should be ignored.
- if an employee starts after 24 May and presents a P45 showing a leaving date in the previous year (e.g. the current tax year is 2011/12 and the leaving date on the P45 falls within the 2010/11 tax year), the Emergency code (747L for 2011/12) must be used, on a W1/M1 basis.
If the date on which the previous employment ended is earlier than six years before the current tax year, the P45 should be destroyed and P46 procedures followed instead. HMRC’s validation systems will reject such a P45.
Tax code changes caused by Budget announcements
In some years, further adjustments to tax codes may be required as a result of Budget announcements. This would, as a result, affect any P45s issued by the previous employer between the start of the tax year and the date on which the Budget changes are implemented, generally the first payday on or after 18 May. If this situation arises, full directions of the special procedures to be followed are provided by HMRC on form P7X and in any reissued Helpbook E12 (found on the Employer CD-ROM issued to employers after the annual Budget).