Tag: tax codes

Paying an employee after giving them a P45

You need to tell HM Revenue and Customs (HMRC) when one of your employees leaves or retires, and deduct and pay the right tax and National Insurance.

You must give your employee a P45 when they leave.

Paying an employee after giving them a P45

If you have to pay an employee after they leave (including someone you’re giving a taxable redundancy payment over £30,000):

  • use tax code 0T on a ‘week 1’ or ‘month 1’ basis (use the code S0T if they’re taxed at the Scottish rate or C0T if they’re taxed at the Welsh rate)
  • deduct National Insurance (unless it’s a redundancy payment) and any student loan repayments as normal – but if it’s an ‘irregular’ payment like accrued holiday pay or an unexpected bonus, treat it as a weekly payment
  • report the payment and deductions in your next FPS, using the employee’s original ‘Date of leaving’ and payroll ID, and set the ‘Payment after leaving’ indicator
  • give the employee written confirmation of the payment showing the gross amount and deductions
  • add the additional payment in the ‘Year to date’ field if the payment is in the same tax year

The payment should be the only one in the ‘Year to date’ field if it’s being paid in the next tax year.

You must not give the employee another P45

Tax Codes

taxcodesYour tax code is used by your employer or pension provider to work out how much Income Tax to take from your pay or pension. HM Revenue and Customs (HMRC) will tell them which code to use.

Find your tax code

Use the check your Income Tax online service within your Personal Tax Account to find your tax code for the current year. You can also view your tax code for:

  • a previous tax year
  • the next tax year

You’ll be asked to sign in with Government Gateway or create an account if you do not already have one.

Once signed in, you can also see:

  • if your tax code has changed
  • how much tax you’re likely to pay

You can also find your tax code on your payslip or tax code letter from HMRC.

If you think your tax code is wrong

If you think your tax code is wrong, you can update your employment details using the check your Income Tax online service.

You can also tell HMRC about a change in income that may have affected your tax code.

Why your tax code might change

HMRC may update your tax code if:

You may also be put on an emergency tax code if you change jobs.

Understanding Cumulative Tax Codes

Tax codes that are applied on a cumulative basis means that tax calculations look at the entire tax year when performing the tax calculation. Using a tax code on a cumulative basis means that every payday, the calculation performed is to work out the tax due on an employee’s earnings for the (tax) year to date then deduct from it the tax they have already paid on their earnings that (tax) year. The remaining figure is the tax due for the pay period.

A Cumulative Tax Code allows for an individual’s weekly / monthly Tax Free Allowance to be carried forward if it is not used. As an example – if an individual were to have a break from work (for example, due to unpaid leave or sickness etc), when they resume, it is often the case that they will pay little or no Tax until they have caught up with their Tax Free Allowances.

A non-cumulative tax code would be signified by an “X” or “W1/M1” following the code. In these cases the tax would be worked out purely on the taxable pay for each individual pay period. Each payday is treated as if it is the first week or month of the tax year. Previous pay and tax details are ignored.

Updating Your Tax Code

You may be put on an emergency tax code if you change jobs. HM Revenue and Customs (HMRC) will correct it automatically after you’ve given your employer details of your previous income or pension.

Your employer will get these details from your P45 – if you don’t have one, they should ask you for further information.

HMRC will also update your tax code when:

After your tax code changes

HMRC will adjust your tax code so you pay the right amount of tax across the year. They’ll write to you or email you when your tax code has been updated.

They will also tell your employer or pension provider that your tax code has changed. Your next payslip should show:

  • your new tax code
  • adjustments to your pay if you were paying the wrong amount of tax

Find out more here

Understanding W1 or M1 Tax Codes

If your employee’s tax code has ‘W1’ or ‘M1’ at the end

W1 (week 1) and M1 (month 1) are emergency tax codes and appear at the end of an employee’s tax code, eg ‘577L W1’ or ‘577L M1’. Calculate your employee’s tax only on what they are paid in the current pay period, not the whole year.

Updating for the new tax year

HM Revenue and Customs (HMRC) will tell you between January and March about any new tax codes to use for employees in the new tax year. This starts on 6 April.

If an employee’s tax code isn’t changing, HMRC won’t contact you and you should carry forward the employee’s tax code to the new tax year.

If your employee’s tax code ends with ‘M1’ or ‘W1’ (‘month 1’ or ‘week 1’), don’t carry this part of the code into the new tax year.

Click here for more information