How do we decide which tax code to use from form P46?

The tax code that is used for a new employee should normally be obtained from the P45 that was issued by the employee’s previous employer.  There are, however, a number of reasons why a P45 might not be produced, for example, because the new employee

• has not been employed before
• was previously self-employed
• has lost the P45
• was previously employed abroad
• has never worked in the UK before.

If there is no P45, either

• the new employee must be given a copy of form P46 to complete, or
• the employer must obtain and retain the necessary information in some other auditable format, such as an internal document or by email from the employee’s line manager.  The employee’s signature is not required, although employers may wish to obtain it for their own purposes.

The only exceptions to the requirement for a P46, or alternative document, to be completed are

• students who are completing form P38(S), and
• “casual” employees who will be employed for no more than a week in the tax year.

Form P46 allows the employer to decide which tax code to apply for the new employee, based on the employee’s response to three carefully worded statements.

Statement A: This is my first job since last 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit or a state or occupational pension.

Statement B: This is now my only job, but since last 6 April I have had another job, or have received taxable Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit. I do not receive a state or occupational pension.

Statement C: I have another job or receive a state or occupational pension.

The employee should check one of the boxes adjacent to the statements and then sign and date the form.  (Box D should also be checked if the employee is liable to make Student Loan repayments – but that is not the subject of this article.)

If the employer is completing the form from information obtained in another format from the employee, the boxes should be checked appropriately.  In that situation, the employee’s signature is not required.

If the employee does not check any of the three boxes A, B or C, or has not provided the relevant information in some other document, the employer must check box C, even if the employee promises to provide a P45 in due course.

From the employee’s responses, the employer can identify the correct tax code to use, as follows:

• If Statement A is checked, the emergency code is used on a cumulative basis.  None of the employee’s personal allowance has been used so far in the tax year.

• If Statement B is checked, the emergency code is used on a week1/month 1 basis.  It is assumed that some of the employee’s personal allowance for the current tax year has already been used.

• If Statement C is checked
  • by the employee, or by the employer from information provided by the employee,  tax code BR is used on a cumulative basis.  It is assumed that all of the employee’s personal allowance has been set against the other job or pension. Tax codes D0 or D1 may not be applied by the employer, if it is appears to be more appropriate than BR in the employee’s circumstances.
  • by the employer because the employee has not checked the box or provided the necessary information, tax code 0T is used on a week 1/month 1 basis.  No personal allowance is provided and tax is paid at the relevant tax rate(s).

The completed P46 is only filed online when the employee has been paid for the first time using the tax code identified by the P46.  In due course, after investigating the employee’s tax circumstances, the tax office may send a P6 coding notice that gives a different tax code to use.

Particular care must be taken where an employee is waiting to receive a P45 from the previous employer, perhaps because the employee left mid-month and the P45 is only issued at the month end.  The new employer may decide not to issue form P46 initially but to process the first wages and wait for the P45 to arrive.  In this situation, tax code 0T W1/M1 must always be used for the first pay calculation, on the basis that the employer did not have the necessary information available to allocate the appropriate tax code.  When the P45 arrives, it should be applied from the second payday, using the rules for deciding which tax code to use from form P45.