5.1 Introduction
Employment changes often occur many times within one tax year, so it makes sense that you will need to undertake certain administrative tasks relating to this on a regular basis.
If you are working within a large business these changes will be frequent. Large-scale payroll departments will often deal with employment changes on a daily basis across much of the month, whereas a smaller business will probably come across such changes much less frequently.
For example
A large-scale hospital in a large city could have agency staff, new starters, employees leaving, students on paid placements, and retirees leaving (and then possibly coming back on a voluntary or part-time basis), and all these events could be very frequent.
When working within a business that has a large number of staff, changes will happen every single day. If you are a smaller company, however, you may find that the same team of staff remain unchanged for many years, and it is only when someone retires, leaves due to ill health or someone new joins the company, that the payroll person needs to deal with such paperwork.
No matter how frequently these changes occur, it is important to know exactly what you need to do to ensure you fulfil your requirements with HMRC and get pay and paperwork correct for the employee. Whilst it is not a particularly complicated process, making sure that you get everything correct is vitally important. When you employ a new person to work within your company, whether they are on an ad-hoc contract, part-time or full-time, you need to set them up within your payroll system, report the information to HMRC, work out their new tax code, and make sure they are paid for the first time and on time.
What to do when an employee starts employment within the company
We have reviewed how important it is to ensure you pay your employees correctly and on time, and the first salary payment is often the trickiest one in terms of timescales and getting all information in on time. It is imperative to try to avoid any problems in relation to their first wage and to make sure that the information you pass to HMRC relates to that particular month, without delay.
The first step is to ask your new employee for their P45, which they should have received from their old employer when they left their last job. If they do not have a P45 for whatever reason, they will need to fill in a Starter Checklist.
This form is filled out by the employee and provides the information you need to enter them into your payroll software. It is important to store this information in your filing system for the following three tax years after the one it pertains to, and to make sure that this is done in a secure and confidential manner. It is possible that your new employee will have more than one P45, for example, if they had more than one job within that tax year. In this case, you might be confused as to which P45 to use. However, you should use the information on the latest P45, with the latest leaving date.
If
the leaving dates are the same, because they left both jobs at the same time to
commence their employment with your company, then you should use the P45 with
the highest allowance of tax-free earnings, and give the other P45 back to the
employee.
You should only store the P45 record pertaining to the information you reported to HMRC. All that is left to do after gaining this information is to set them up on your payroll system, inputting the information from their P45 or Starter Checklist. This will ensure they get paid on time. The software will then work out their new tax code and send the information to HMRC when you submit it, which will register them as a new employee within HMRC records.
5.2 When an Employee Leaves Employment Within the Company
When an employee first gives notice that they wish to terminate their employment within your company, you need to start the reporting and paperwork process.
Legally, if an employee has been in a job for more than one month, then at least one week's notice must be given to the employer. However, different employment contracts have different notice terms; for instance, the most common notice period is four weeks in writing, although for some positions a much longer notice period may be stipulated if it is reasonable in all the circumstances (i.e. what is normal for a person of that seniority and in the industry).
As soon as you receive this notice you need to advise HMRC that the employee is leaving, what date they are leaving your company, whether they are leaving for retirement, and to ensure they pay the correct tax and National Insurance before they leave, which is done via your payroll full payment submission within that month.
You could argue that the process of reporting and arrangements for an employee leaving is a little easier than an employee starting within the company simply because there is less paperwork involved and less inputting. You simply need to enter the employee's leaving date onto their payroll record and ensure that pay and deductions are continued as normal within your next submission to HMRC.
If you are paying them a pension, this is a slightly different procedure, and guidance should be sought from HMRC to ensure the correct payments and deductions are made, without any errors.
Once this is done, you need to produce a P45 to give to your employee. This is a legal requirement, and most software packages produce them as standard. Very few companies may be exempt from filing their payroll online, in which case copies of P45s can be obtained directly from HMRC.
5.3 What is a P45?
A P45 is a legal requirement - it is a document given to an employee when they leave their current employment.
It provides general information about the employee and shows how much tax they have paid so far within that current tax year. This allows their new employer to set them up on their own payroll system, with the correct figures, without disruption to tax and National Insurance, and without disruption to the employee's first salary payment within their new job.
A P45 has four parts:
- -Part 1 is completed and sent to HMRC by the employer
-Part 1A is completed and kept by the employee
- -Parts 2 and 3 are completed and given to the new employer when starting a new job
The employee needs to keep these documents safe, and the employer needs to store the information for three years after the tax year it pertains to, within their secure and confidential filing system.
5.4 The Importance of Clear and Timely Communication
Communication is vitally important in relation to any changes to employment.
If you do not communicate the right information to the right people, you risk:
1. not reporting correct information to HMRC, which could result in fines and considerable disruption
2. disruption to your new employee's first salary payment
The main problems tend to come when a company outsources their payroll responsibilities because if you use an accountant or bookkeeper who is not on the premises, they rely upon communication from the company to keep them up to date with developments. Putting into place a fail-safe system to communicate such issues is vital and something which needs to be reviewed on a regular basis to ensure the system is working to its optimum level. The consequences of not letting your accountant or bookkeeper know when someone starts within the company are that the employee will not get paid and perhaps a one-off payment will need to be authorised. Also, the employee will not be registered with HMRC as working for you. This is a time-consuming mistake to make and one which could come at a considerable cost.
On the other hand, if you do not communicate the fact that someone has left employment within your company, there are more problems. The employee will still be paid automatically, which means you need to recoup the money; causing possible distress and upset. A P45 will not have been produced automatically by your payroll software, which again causes a delay for the employee leaving and setting up their wages with the next employer, and calculations are made more complicated because the final reporting to HMRC will be late and inaccurate.
How to ensure good communication
It is very important to ensure sure communication channels are open and clear.A weekly meeting with your accountant or bookkeeper is a good idea, but always report changes to employment as soon as you know about them because this means everyone knows what is happening and everyone is kept informed. A secure email system is recommended, so as soon as you receive notice of termination of employment, send a copy to your payroll personnel, and similarly, as soon as you receive a P45 or new starter form for a new employee, send that on too.
If you work within a large-scale company and you have a payroll department, it is important to ensure that department managers pass on notices of termination, as well as new starter forms. Set up a monthly deadline date and reinforce the importance on a regular basis, to ensure problems do not occur in the first place.
The importance of timekeeping in relation to employment changes
You need to include your leaving employee on your full payment submission to HMRC, stating their leaving date to ensure the correct amount of income tax and National Insurance is deducted. If you do this too late it will cause problems with the following weekly/monthly final submission, which will be costly and time-consuming when trying to resolve and correct with HMRC. Similarly, if a new starter isn't included in the full payment submission for their first month of work, they won't get paid, which is unfair to the employee. Timekeeping and communication are, therefore, vital in terms of changes in employment and is not a task to be postponed, but one that requires immediate attention. Deal with it as soon as you receive the paperwork - communicate the correct information to the correct people and the process is simplified as a result.
5.5 Tax Codes
Each employee has a tax code which determines how much tax they pay and which can always be found on their P45.
Tax codes are depicted as a combination of letters and numbers that show how much income tax should be deducted from salary. The numbers indicate a person's tax relief entitlement, while the letters describe their personal situation and how this affects their tax responsibilities.
Further and current information regarding tax codes can be found on www.gov.uk
Your payroll software will use the tax code to calculate how much tax should be deducted from an employee's salary. If the employee's circumstances change significantly their tax code will be updated.
HMRC updates tax codes under the following circumstances:
· An employee receiving a pension or additional income from a new job
· An employee's basic income has changed
· An employee claims the Marriage Allowance or expenses that attract tax benefits
· An employee has started, stopped or received a change regarding taxable company benefits
· An employee is in receipt of taxable state benefits
HMRC will notify an employer if an employee's tax code has been updated and needs to be amended on your payroll system. Note that emergency tax may apply when any employee is changing jobs
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