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Part 1 of this Payroll Tip considers the checks that an employer must make to the first six of the seven items that appear on Part 2 of a form P45 that is provided by a new employee.
The figures, if any, entered by the previous employer at item 7 must be checked carefully to ensure that the tax deducted from the employee's future earnings is calculated correctly.
Item 7 provides the employee's 'total pay to date' and 'total tax to date' at the end of the previous employment, at the week or month number shown.
However, if the P45 shows an 'X' in the 'Week 1 or Month 1' section of item 6, there should be no pay and tax details at item 7. The tax code used for the new employee must be applied on a non-cumulative basis, without taking any of the pay and tax in the previous employment into consideration.
Otherwise, the 'Total tax to date' figure at item 7 must be checked for accuracy in every case. HMRC's instructions (E13 Helpbook, page 21) are explicit: "Do not (use) the 'Total tax to date' figure, shown at item 7 of the P45". Instead, the employer must work out the tax due to date using the tax tables, based on the 'total pay to date', the tax code, and the week/month number.
Some modern payroll systems perform this tax check automatically when the employee's payroll record is set up and the P45 details are entered. Other systems provide a simple P45 Checker in order to simplify this procedure. One of the tools provided by HMRC on the annual Employer CD-ROM is a P45 Checker.
If there is a discrepancy between the correct tax figure, as calculated, and the figure entered by the previous employer on the P45, the tax figure that must be used in setting up the employee's payroll record is,
- if the tax code is a K code, the lower of the calculated figure and the P45 figure
- otherwise, the calculated figure.
If, as a result of these checks, the new employer has to use the calculated figure rather than the figure at item 7, the calculated figure must be entered at item 13 on Part 3 of the P45. The only exception to that rule is if the P45 details are being submitted electronically. The electronic version of the P45 Part 3 does not have an item 13, so the employer cannot report the figure that is actually being used on the payroll. On receiving the P45 details electronically, HMRC identifies the discrepancy and the employer is sent a P6 with correct figures to apply as appropriate.
This check of the tax figure at item 7 is not optional; it must be performed for every P45 that shows a 'Total tax to date' figure.
...back to 13 April 2006
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For Payroll and Human Resource Professionals
