What is a P45?
A P45 is a form used in the United Kingdom to document the details of an employee’s tax contributions and employment status when they leave a job. It includes information such as the employee’s tax code, pay, and the amount of tax deducted from their salary. The P45 is divided into four parts, which are distributed to the employee, their new employer, and HM Revenue and Customs (HMRC). This form is essential for ensuring that the employee pays the correct amount of tax in their new job and can claim any overpaid tax.
Purpose and Importance of a P45
The primary purpose of a P45 is to provide a record of an employee’s tax details up to the date they leave their current employment. It serves several crucial functions:
Tax Calculation: It ensures that the employee’s tax code is accurately transferred to their new employment, helping to calculate tax deductions correctly.
Tax Refunds: If an employee has overpaid tax, the P45 helps in claiming a refund from HMRC.
Benefits and Credits: It is necessary for claiming certain benefits and tax credits.
New Employment: The new employer uses the P45 to set up the correct tax code and deduct the right amount of tax.
The importance of a P45 cannot be overstated. Without it, employees may be placed on an emergency tax code, leading to incorrect tax deductions.
Employer Responsibilities
Employers have specific legal obligations when an employee leaves their employment. These responsibilities include issuing a P45 promptly to ensure the departing employee can provide it to their next employer and avoid any tax complications.
Legal Obligations of an Employer
Accurate Information: Ensure that the information on the P45 is accurate, reflecting the employee’s earnings and tax deductions up to their leaving date.
Timely Issuance: Provide the P45 to the employee without undue delay.
Reporting to HMRC: Submit the relevant parts of the P45 to HMRC as part of the Real Time Information (RTI) submissions.
Failing to comply with these obligations can lead to issues for both the employer and the employee, including incorrect tax calculations and potential penalties from HMRC.
How to Generate a P45
Generating a P45 involves several steps, ensuring that the correct information is gathered and reported. Here is a step-by-step guide on how employers can generate a P45 for a departing employee:
Step 1: Gather Necessary Information
Before generating a P45, collect the following information about the employee:
Full name and address
National Insurance number
Tax code
Gross earnings for the year to date
Total tax deducted for the year to date
Leaving date
Step 2: Use Payroll Software
Most modern payroll systems can generate a P45 automatically. The process typically involves:
Access Payroll Software: Log in to your payroll software system.
Enter Leaving Date: Input the employee’s leaving date.
Review Details: Ensure all the employee’s details and year-to-date earnings and tax deductions are correct.
Generate P45: Use the software to generate the P45 form. The system will usually produce four parts of the P45.
Step 3: Distribute the P45
Once generated, distribute the parts of the P45 as follows:
Part 1: Send to HMRC electronically as part of your RTI submissions.
Part 1A: Provide to the employee for their records.
Parts 2 and 3: Give to the employee to pass on to their new employer.
Step 4: Contact HMRC if Needed
If you encounter any issues or if your payroll software does not support automatic P45 generation, contact HMRC for guidance. HMRC can provide instructions or manual forms if necessary.
Step 5: Maintain Records
Keep a copy of the P45 and the associated records for your own files. This is important for compliance and future reference.
Timeframe for Providing a P45
Legally, employers must provide the P45 to the departing employee on or before their final payday. This ensures that the employee has all necessary documentation to transition smoothly to their next job.
Key Timeframes to Note
Immediate Issuance: Issue the P45 immediately upon termination of employment.
Final Pay Date: Ensure the P45 is provided no later than the final payday.
Timely issuance helps prevent any delays or issues in the employee’s tax affairs and benefits claims.
Consequences of Non-Compliance
Failing to provide a P45 within the required timeframe can lead to several consequences:
For Employers
HMRC Penalties: Employers may face penalties from HMRC for not complying with tax reporting requirements.
Administrative Burden: Increased administrative burden in resolving issues that arise from non-compliance.
Employee Relations: Potential damage to the employer’s reputation and employee relations.
For Employees
Incorrect Tax Deductions: Employees may be placed on an emergency tax code, resulting in incorrect tax deductions.
Delayed Benefits: Potential delays in claiming benefits and tax credits.
Financial Inconvenience: Possible financial inconvenience and stress due to incorrect tax calculations.
Conclusion
Issuing a P45 is a critical responsibility for employers when an employee leaves their job. Understanding what a P45 is, its purpose, and the steps to generate and distribute it ensures compliance with legal obligations and smooth transitions for employees. By adhering to the outlined procedures and timelines, employers can avoid penalties and support their employees in managing their tax affairs effectively.
FAQs
What is the alternative to the P45?
The alternative to the P45 is the “New Starter Checklist” (formerly known as the P46). The New Starter Checklist is used by employees who do not have a P45 when starting a new job. It helps ensure the correct amount of tax is deducted from their earnings by providing necessary personal and employment details to their new employer.
What is the difference between P45 and P46?
The P45 is a document given to an employee when they leave a job, detailing their earnings and the tax paid during their employment. The P46, now replaced by the New Starter Checklist, is used by new employees who do not have a P45, to provide their tax information to their new employer. Essentially, the P45 is used when leaving a job, while the P46/New Starter Checklist is used when starting a new job without a P45.
How do I get a P45?
To get a P45, you must request it from your employer when you leave your job. Your employer is legally required to provide you with this document, which details your earnings and the tax paid during your employment. If you do not receive it, contact your employer’s HR or payroll department to obtain it.