Applying the P7X

There are some unexpected complications this year in applying the Budget tax changes, caused by the Revenue's choice of 18 June as the implementation date. In previous years, when the Budget was in March, the changes were always applied from the first payday on or after 18 May - a sensible date, as it is the first day of tax week 7. However, there is nothing sensible about the choice of 18 June, as it falls part way through tax week 11, which runs from Saturday, 15 June, to Friday, 21 June.

The new tax tables must be used, and tax codes ending in 'A' and 'H' must be increased by 2 and 4 points respectively, from the first payday on or after 18 June. As 18 June is a Tuesday, it cannot be said that the changes apply universally from week 11. As most weekly-paid employees are paid on Thursday or Friday, the changes will apply from week 11 in their case. However, the changes for any employees paid on a Saturday will apply from week 12.

The first complication caused by the Revenue's instructions arises when employees leave in week 11. The instruction given on form P7X is that the code uplifts and new tax tables should not be used to calculate the final pay for employees leaving before 18 June, even if their payday is on or after 18 June. The first of the two examples given on page 10 of the Employer's Bulletin in the Budget Pack gives a different - and very confusing - instruction. It says that the code uplifts and new tax tables should not be used in the case of an employee who leaves before 18 June, is paid on or after 18 June, and was not issued with a P45 on the leaving date.

Even if those instructions mean that the code uplifts and new tax tables should not apply to employees who leave in week 11 but before 18 June, they are probably impossible to follow where the employee's final pay is calculated on a computerised payroll system. Payroll systems are not designed to apply two different sets of tax rules within the same pay period. The end result is that there will be no consistency in the way in which the P7X instructions are applied for leavers in week 11.

This leads into the second complication, which arises when a new employee is taken on who brings a P45 from the previous employer that shows earnings and tax information as at week 11. It cannot be assumed that the tax shown on the P45 has been calculated using the new tax rates. Neither can it be assumed, if the employee's tax code ends in 'A' or 'H', that that code has been updated according to the P7X instructions. The second of the two examples in the Employer's Bulletin says that an 'A' or 'H' code should only be increased if the employer is "reasonably" sure that the code has not already been increased. The only way to tell if it has been increased is to check the tax shown on the P45 against, if necessary, both the old and new tax tables.

The Revenue has suggested, in the latest guidance notes for software developers, that employers may apply the following procedure in order to check whether the P7X instructions have been applied to a P45 that shows week 11 and a tax code ending in 'A' or 'H':

• calculate the tax due at week 11 using the May 2001 tax tables
• if the tax due matches the tax figure on the P45, assume that the tax code has not been increased and apply the P7X uplifts
• if the tax due does not match the tax figure on the P45, calculate the tax due at week 11 using the June 2002 tax tables
• if the tax figures match, assume that the tax code has already been amended and do not increase it further
• if the tax figures still do not match, nevertheless assume that the tax code has been increased and do not increase it further

If, following this routine, the employer decides to increase the tax code or to use a tax figure different to that entered by the previous employer, the details should be entered at items 12 and 13, respectively, of the P45. Note, however, that the Revenue's instructions are to write the amended tax code alongside the code shown at item 6, despite the box at item 12 being provided specially for the purpose.

The comments above refer to weekly-paid employees but the principles apply equally to employees paid fortnightly, four-weekly or monthly. In the case of most monthly payrolls, the P7X instructions will be applied from month 3. However, if the payday precedes 18 June, the changes will be applied from month 4. If the payday is at the end of the month and an employee leaves on 14 June and the pay is calculated and the P45 issued on that date, the P7X instructions should not be applied. However, if that leaver's pay is processed later in the month at the same time as all other employees, it will not be possible to calculate the pay and produce the P45 without having applied the P7X changes.
Payroll Briefing 1 - 11 June 2002