The P45 is a piece of paper much-maligned and feared by British employees, since it is given to them when they leave their job. The payroll department in your new job, however, will be glad to see it, for it means that they can tax you correctly when they pay you.
So what information is shown on the form?
The P45 comes in four parts – parts 1,1A, 2, and 3. Sometimes these parts are on carbon paper and completed manually, and sometimes each part is printed individually by computer.
Part 1 is rarely seen by the employee – this is completed by the employer when an employee leaves, and is sent to the employee’s tax office before they are given the three remaining parts of the form.
Part 1 is generally yellow in colour, and shows the following information:
1. PAYE Reference: - Office number eg 961 – These three digits represent the tax office dealing with an employee’s tax affairs. (In Scotland, 961 is one of the commonest codes seen here – it stands for the Centre 1 tax office in East Kilbride.)
Reference number eg 1234567 – this is your employer’s Employer Reference (formerly known as your PAYE Reference) and tells the Inland Revenue which employer is sending them the P45.
2. Employee’s National Insurance number eg AB123456C – most people will be familiar with this number, since it will have been given to them when they were 16. This number is similar to the American Social Security number, and is used by the taxman, the DSS (Dept of Social Security), and the Benefits Agency when dealing with an employee’s paperwork.
Mr Mrs Miss Ms Other
First Name (s)
4. Leaving date This date becomes important when we consider the cumulative basis of tax in the UK (see below).
5. Continue Student Loan Deductions Some former students have deductions from their pay to pay off student loans. New employers will need to know whether to continue making deductions.
6. Tax code at leaving date ‘X’ in the box means Week 1 or Month 1 basis applies eg 453L, or BR X - Now we get to the nitty-gritty! 453L indicates that the employee has been given the normal personal allowances for the tax year 2001/2, ie 453 x 10 = £4,530. This amount will be free of tax during the tax year. L is the normal letter here, although sometimes letters such as K or V will appear. A K code indicates that an employee obtains more benefits in kind from his employment than his allowances, and the tax code amount would be added to his taxable pay, not deducted from it. An employee taxed at BR (basic rate) will be taxed on a percentage of all his pay, with no allowances deducted. This usually applies where an employee has another job, which uses up his allowances.
The box for Month 1/Week 1 basis refers to the fact that the British PAYE system works on a cumulative basis. When an employee is paid in month 3 of the tax year, for instance, his tax for the year will be calculated on 3/12 of his allowances for the year, and any tax he has already paid will be deducted from the total tax due, to give his tax figure for month 3. Where the employer does not know the tax paid in the year so far (for example, because he has not received a P45), he may be forced to operate on a Month 1 or Week 1 basis, giving one month’s or 1 week’s allowances in respect of that month’s/week’s earnings.
7. Last entries on Deductions Working Sheet (P11) Complete only if Tax Code is cumulative Make no entry here if Week 1 or Month 1 basis applies. Week or month number, Total pay to date, Total tax to date – these figures are necessary to apply the cumulative basis, since it is necessary to know the amounts paid and taxed to date to calculate the tax due in this pay period (this month or this week).
The P11 form referred to is the form used for manual payroll calculations. These days, computer programs have largely done away with the need for these, although most programs will have an option to print out employee pay details for the year.
8. This employment pay and tax No entry needed if Tax Code is cumulative and amounts are same as item 7 entry. Total pay in this employment Total tax in this employment This gives the pay and tax figures for this employer, as opposed to all an employee’s employers in the tax year, all of which will be included in the cumulative calculations.
9. Works number/Payroll number – any reference number used by the employer.
10. Department or branch if any
11. Employee’s private address and Postcode
12. I certify that the details entered above in items 1 to 10 are correct Employer’s name, address and Postcode, Date
Instructions to the employer are then given, along with a box to be marked ‘D’ if the employee has died.
Parts 1A and 2 contain much the same information as Part 1, except they only show items 1 to 7 above. Part 1A will be kept by the employee leaving his job, and will be useful in preparing any self-assessment tax return, for instance. Part 2 is intended for the new employer, to enable them to operate their payroll records for the employee.
Part 3 New employee details For completion by the new employer – This part should be completed by the new employer, and forwarded to the Inland Revenue. This will enable the Revenue to update its records with the employee’s new employment.
Items 1 to 7 are as before. The other details that require to be completed are:
8. New PAYE Reference as item 1 above, this gives the employer’s tax reference for the Inland Revenue.
9. Date employment started
10. Works/Payroll number, Department or branch if any
11. Enter P if employee will not be paid by you between date employment began and next 5 April This tends to occur in family business, where an annual bonus may be paid after the company’s year end.
12. Enter code in use if different to code at item 6
13. If the tax figure you are entering on P11 differs from item 7 above please enter your figure here For items 12 and 13, the Revenue will need to know if the payroll department is using figures different from the ones shown above.
14. Employee’s private address
15. Employee’s date of birth
16. New employee’s job title or description
17. Declaration. I have prepared a Deductions Working Sheet (P11) in accordance with the details above.
Employer’s name, address, and postcode Date
Once the above details have been completed and sent off to the Revenue, the employee will be sure to be taxed correctly, and the P45’s usefulness will be at an end.
So next time your boss looks at you and says, “Sorry, son”, and hands you your P45, you’ll be able to appreciate the wealth of information contained in that flimsy little document, and you can walk out with a smile on your face – well, maybe not!