An employee’s tax code is particular to their personal circumstances which, as an employer, you may not be aware of.
Each person has the same starting point, based on the personal allowance in the relevant tax year, which is £12,570 per annum in the current tax year 2022-23.
Adjustments are then made depending on if there is additional income, benefits/expenses or underpaid tax to be taken into consideration in the final tax code calculation. If an amendment is made to an employee’s tax code, HMRC will communicate this via post or their personal tax account on HMRC’s website, providing an explanation behind the code generation.
Employers will be notified on Forms P9 at the commencement of the tax year, or P6 during the tax year and are issued on the tax code download routine on payroll software or by post.
New Employees
When taking on a new employee, there is specific documentation to help employers to apply the appropriate tax code. These come in two formats:
- Form P45 from their previous employer
- New Starter Checklist available from HMRC
Form P45
If an employee has been in employment prior to commencing with your organisation, their previous employer should have issued a Form P45 to them, which provides the following details:
- Gross taxable pay in the employment, unless on a Week1/Month 1 basis
- Tax paid in the employment, unless on a
- Week1/Month 1 basis
- Tax code used
- Leave date
- Student loan advisory
- National Insurance number
Form P45 is made up of multiple pages, one to be retained by the employee as indicated, and employers use Parts 2 & 3.
If these parts are not provided or the employee commences without a Form P45, then ask the employee to complete a New Starter Checklist, which will compile the data required to report to HMRC.
Form P45 is implemented irrespective of an employee’s opinion unless it is from a previous tax year, whereupon a New Starter Checklist should be completed.
New Starter Checklist
The New Starter Checklist will require the personal details of the employee, including:
- Full Name, including any middle names (no abbreviations or nicknames)
- Address
- Date of Birth
- National Insurance number
- Start date of employment
- Sex (as per birth certificate or gender recognition certificate)
The employee is required to make a statement relating to their circumstances which will affect which tax code to apply.
There are 3 statements to choose from:
Do you have another job?
This will require a tick in Box C and the employee will be subject to a tax code of BR (Basic Rate tax, currently 20% (Tax year 2022-23).
Do you receive pension payments, be that State, workplace or private arrangement?
This will require a tick in Box C and the employee will be subject to a tax code of BR (Basic Rate tax, currently 20% (Tax year 2022-23).
Since 6 April have you received payments from: Another job, Job Seekers Allowance, Employement and Support Allowance, Incapacity Benefit
If an employee’s answer to these is Yes, then Box B should be ticked, and they should be placed on the current personal allowance of 1257L Week 1/Month 1 (2022-23).
If an employee’s answer to these is No, then Box A should be ticked, and they should be placed on the current personal allowance of 1257L Week 1/Month 1 (2022-23).
Please be aware that if the employee does not select one of the statements, they must be placed on 0T Week 1/Month 1 and no allowances will be given, creating a tax liability from the first £1.00.
Upon receipt of a notification from HMRC, the tax code should be amended accordingly.
Please be aware that if the employee does not select one of the statements, they must be placed on 0T Week 1/Month 1 and no allowances will be given, creating a tax liability from the first £1.00. Upon receipt of a notification from HMRC the tax code should be amended accordingly.
The final page of the checklist refers to Student Loans and requires the employee to declare:
- whether they have a loan
- whether they are making payments direct to the Student Loans Company
- which Student Loan or Loans are applicable to them
At the foot of the document is a Declaration for the employee to sign and date, providing the confirmation that the information given is accurate.
New employee information will be submitted to HMRC on the RTI submission following the payroll process and will appear in the FPS. From here, HMRC can establish the correct tax code to be applied to the employee and will notify the employer electronically or by paper format.
Existing employees
There may be occasions when an employee’s tax code is amended during the tax year, for example, following submission of P11d’s for Benefits and Expenses. An explanation of the change in code will have been provided to the employee to their home address registered at HMRC, or their personal tax portal.
If an employee does not agree with their tax coding, they should speak directly with HMRC as they will have all relevant employee data. The employee helpline telephone number is 0300 200 3300.