How do we decide which tax code to use from form P45?

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 a four-part document that is completed by an employer when an employee leaves. The version of the form that is designed to be completed manually is only partially carbonised, in order to transfer only relevant details to the different parts. Part 1 is sent by the former employer to that employer's tax office. The remaining three parts are given to the employee.

Part 1A is for the employee to keep and use, if necessary, for completing a tax return.

The employee gives Parts 2 and 3 to the new employer. Part 2 is kept as part of the new employer's records and Part 3 is completed by the new employer and sent to that employer's tax office.

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 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:

1. where the P45 was issued by the previous employer in a tax year prior to the current tax year, or
   
   
2. 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

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 2007, all 'L' tax codes were increased by 19 points, e.g. from 503L to 522L, 339L to 358L, 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 for a tax year earlier than the previous year (e.g. the current tax year is 2007/08 and the leaving date on the P45 is before 6 April 2006), the Emergency code (522L for 2007/08) must be used, on a W1/M1 basis.
  
  
• if an employee starts up to 24 May and presents a P45 for the previous year (e.g. the current tax year is 2007/08 and the leaving date on the P45 falls within the 2006/07 tax year), the code shown may be used, after applying the adjustment described 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 for the previous year, the Emergency code (522L for 2007/08) must be used, on a W1/M1 basis.

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).

View More Employer FAQs
Latest UK Payroll News

---

The UK Payroll News is sponsored by HRD & Payroll Solutions

Discuss this news item in the PayPerShop Forum

---

News Category Index	FAQs for Employers	Send E-mail	Home Page