HMRC’s final word on 0T tax code issues?Tuesday, December 7th, 2010
The latest weekly informal update (dated 26 November) from HMRC to employer representatives is one of three announcements that have been issued over the past week to explain the changes that are being made to the use of tax code 0T from April 2011. The others are two separate emails that were sent to payroll software developers – the first to give the decisions, the second (in answer to queries raised on the first) to give the final decisions. It is clear that HMRC is not prepared to permit employers to allocate codes D0 or D1 of their own volition.
We have reproduced the update below and, after each section, provided more details from the second email – together with some comments of our own.
An employee starts working for you but does not provide a form P45
This will affect individuals who fail to complete a form P46 before their first payday. Currently where an employee fails to complete the P46 you complete it to the best of your knowledge, tick checkbox C and submit it to us to update their record and issue a tax code if necessary. In the meantime you are authorised to operate code BR on a cumulative basis. This can result in higher paid employees paying less tax than is due and an underpayment arising at the year end. From April 2011 we will be changing the code you will operate to 0T (zero allowances) instead of BR, so that the employee will pay tax at the basic, higher and additional rate as appropriate.
The relevant email instructions state:
- A P46 is completed and box C is ticked – code BR will still be applicable.
- A P46 is completed and no boxes are ticked – code 0T must be operated from 6th April 2011.
On an initial reading, the two documents appear to contradict each other in some respects. However, taking both together, the situation becomes clear.
The issue here involves Box C only. Using HMRC’s Online Services or payroll systems that have online filing facilities, the employer must enter either A, B or C when indicating which Box is checked – it cannot be left blank. On the other hand, the paper P46, which few employers may now use, can be filed without any box ticked. Currently, where online services are used for filing, code BR is allocated automatically if Box C is checked. From April 2011, if Box C is checked, the employer will allocate:
- code 0T W1/M1 if the new employee has not ticked any box, or
- code BR (cumulative) if the new employee has another job or receives a state or occupational pension.
In the first situation, code 0T is appropriate because there is uncertainty about the employee’s circumstances. The appropriate tax rates are applied according the employee’s level of earnings but no personal allowance is given.
In the second situation, code BR may continue to under-deduct tax if the employee, in fact, is liable for tax at 40% or 50%. However, HMRC states in the email:
Once the P46 is received by HMRC the figure of estimated pay and allowances due that we hold on the individual’s record are reviewed and where they are already due to pay tax at higher rate(s) then the appropriate tax code will be issued automatically i.e. D0 or D1.
An employer makes a payment to an individual after leaving their employment
Currently the guidance says you have to deduct tax at BR on any payments made to an employee after the employment has ceased, if they have not been included in their form P45. If the individual is liable to tax at the higher or additional rate however this will result in an underpayment that we would need to collect from the employee. From April 2011 we will be changing the code we authorise you to operate from BR to 0T. Code 0T will ensure that tax is deducted from payments at the basic, higher and if appropriate the additional rate of tax.
The relevant email instructions state:
- A payment is made to a former employee for whom a P45 has already been produced – code 0T must be operated.
- A payment is made to the representative of a deceased employee for whom a P45 has already been produced – Code 0T must be operated from 6/4/11.
- A payment is made to the representative of a deceased employee in a later tax year to the one in which the employee died – Code 0T must be operated from 6/4/11.
- A payment is made to pension recipient who died in previous tax year and for whom a P45 has already been produced – same as above.
It is disappointing that the guidance still does not indicate whether 0T should be operated cumulatively or on a W1/M1 basis. The current guidance requires code BR to be operated non-cumulatively and it is assumed that the same will apply to code 0T. But HMRC needs to make that clear in its guidance.
When we last discussed this change, we provided our own examples to show that, if employers are not to be trusted to allocate codes D0 or D1, code 0T W1/M1 would be more effective than BR. We are repeating these again. They use 2010/11 tax thresholds.
If the payment for a monthly-paid employee is:
- £2,000, the tax using
- BR M1 would be £400
- 0T M1 would also be £400 (with tax calculated only at 20%)
- £5,000, the tax using
- BR M1 would be £1,000
- 0T M1 would be £1,376.66 (with tax calculated at 20% and 40%)
- £10,000, the tax using
- BR M1 would be £2,000
- 0T M1 would be £3,376.66 (with tax calculated at 20% and 40%)
- £20,000, the tax using
- BR M1 would be £4,000
- 0T M1 would be £8,126.66 (with tax calculated at 20%, 40% and 50%)
HMRC’s earlier explanation of this change referred specifically to “standard payments” which, according to HMRC’s definition in booklet CWG2 (page 15), does not refer to one-off termination payments, such as redundancy pay, pay in lieu of notice, lump sum retirement payments, etc., to which the £30,000 tax exemption may apply. The term “standard payments” is no longer being used and it is assumed, therefore, that this change will apply to all termination payments, whatever their nature, that are paid after the P45 has been issued. HMRC also needs to make this clear.
An employer continues to make payments to an individual as an employee and then begins paying them a pension
It is becoming commonplace for employees to begin receiving occupational pension payments whilst continuing in employment with their existing employer. In this event the current guidance instructs you to continue using the same tax code against the individual’s employment income until we issue a new code. We also tell you to operate the same tax code against the pension payments on a Week 1/Month 1 basis. This can result in the employee receiving more personal allowances than they should and an underpayment of tax arising at the tax year end. To remedy this, from April 2011 the authorised code to be operated against the occupational pension receipts will be changed to code 0T where the employee continues to work for you.
The relevant email instructions state:
- A P46(Pen) is completed for an pension recipient who is remaining in employment with the same employer – Code 0T must be operated from 6th April 2011.
The current procedure is still described incorrectly here, even though we pointed out the error in the comments we made to HMRC on the earlier announcements. In this situation, booklet CWG2 (page 22) instructs employers to advise HMRC using form P46(Pen) and, until HMRC sends new coding notices, calculate tax using
- the employee’s existing tax code for the wage or salary, and
- code BR on a W1/M1 basis for the pension payments.
Code 0T is certainly more appropriate than BR for taxing the pension payments as the higher rates of tax will be applied to larger pension payments. Again, however, the guidance fails to clarify whether or not 0T will be applied on a W1/M1 basis, as is BR currently in this situation. In a sense it does not matter – there are no earlier payments to be affected and the pension payments are likely to be the same each period. Nevertheless, HMRC should make this clear.
Overall, subject to some areas that still require clarification, the changes appear to be sensible. It is clear that HMRC has made a policy decision that codes D0 and D1 can only be applied on receipt of a coding notice. Employers are not permitted to deviate from the new rules, even where it is clear that D0 and D1 would be more appropriate or where the employee asks the employer to apply D0 or D1.
Finally, HMRC’s announcement states:
Detailed employer guidance regarding the uncompleted P46 will be included in the E13 ‘Day to day Payroll’ helpbook. The other changes will be included in the CWG2 ‘Employers Further Guide to PAYE and NICs’. The 2011 version of these helpbooks will be published online in February 2011.