The P45 form is an important form you should know about as an employer. This form provides information about an employee’s income and how much tax they’ve paid from it.
We’ll go over everything you need to know about P45s and how you can issue one for employees who are leaving or joining your company.
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What is a P45 form?
P45 is the reference code of the “Details of employee leaving work” tax form. It’s an essential Pay As You Earn (PAYE) form. Employers in the United Kingdom typically issue the P45 form to an employee after their tenure or termination of their employment contract.
When hiring, employers should request the P45 form from any individual joining their organisation. However, some new hires might not have a P45 form from their previous employer - we’ll talk about what to do in this case in a bit
Understanding how to use a P45 form if you pay your employees under the Pay As You Earn (PAYE) tax scheme is crucial. That’s because income tax and National Insurance Contributions (NIC) are drawn from an employee’s salary and remitted to HM Revenue and Customs (HMRC) under the PAYE tax system.
So with the P45 form, you’ll be able to tell how much tax a new employee has already paid within a tax year and how much you’ll need to withhold from their salary for the rest of the tax year.
Why do employees need them?
For starters, it’s the law. You’re required to provide any employee leaving your company (no matter the reason) with a P45 form.
So whether an employee leaves because they got fired, found employment elsewhere, retired, or became redundant, you’re still legally obligated to issue them a P45.
Another important reason for issuing a P45 form is that you’ll need it to assign each employee with the correct tax code. An employee’s tax code — provided by HMRC — will help you determine how much income tax to take from their pay.
Finally, employees need a P45 because it saves everyone, including you, time and the stress and effort involved in handling unwanted admin tasks.
What info should a P45 form show?
A P45 form is made up of several parts — part 1, 1a, 2, and 3.
How important (or relevant) each part depends on whether you’re the employer whose employee is leaving or the one hiring a new employee. For instance, if your employee is leaving, part 1 and 1a will be the most important sections for you.
Here’s the breakdown of these four different sections.
Part 1: You’ll need to fill out this part and send it to HMRC. This is to show and put on record that an employee is no longer working with you.
Part 1a: You should give this section to the employee - they’ll need this for their records.
Part 2 and Part 3 are for the employee to give to their new employer (or Jobcentre Plus if they’re not working):
Part 2: This is a copy of the completed P45 form that the former employee will need to pass on to their new employer.
Part 3: This copy helps former employees register with HMRC in their new place of employment.
To sum up:
Except for Part 1, which you’ll need to send directly to HMRC, you’ll have to give your leaving employee the remaining parts 1a, 2, and 3. As per HMRC guidance, employees are expected to provide their new employers parts 2 and 3 (or send them to Jobcentre Plus if they’re not working).
Here’s the information you’re expected to fill in on a typical P45 form.
For Part 1 and 1a:
Employer PAYE reference number
Employee’s National Insurance Number
Name, title, and other details of the leaving employee
Employee’s leaving date
Employment total pay received and tax deducted — to be left blank if tax code is cumulative
Indication for whether an employee needs to keep paying for their student loan
Tax code at leaving date
For Parts 3 and 4:
New employer PAYE reference
Date new employment started
Employee Works/Payroll number
“P” indication if you’ll not pay the new employee between the date employment began and the next 5 April.
Tax code. You can ignore it if it’s the same as the previous code
Employee’s personal details and information
Declaration of P11 Deduction Working Sheet
When do I need to give my employees a P45 form?
You should issue the P45 form to your employee along with their final paycheck. In other words, you should send it out as soon as possible.
Failure to give your employee a P45 form on time could result in them reporting you to HMRC.
PayFit helps employers automatically produce and issue P45 forms once an employee’s time at your company comes to an end. This way, you don’t have to do anything aside from processing the employee termination.
However, if you don’t have payroll software and have less than ten employees, you can use HMRC’s free PAYE tools to generate the P45 form.
It’s best practice to keep all P45 forms for at least 20 years after you’ve issued them, as the HMRC can still carry out tax investigations during that period.
P45 for new employees: What should I do?
What if you’re the one hiring a new employee? First, you should ask any new employee for Parts 2 and 3 of their P45 form if they have one from their previous employer.
Once you’ve received Parts 2 and 3 from new employees, you should fill in the necessary information from your end and submit the form to HMRC.
You should note that the P45 form is only valid if it was issued within the same tax year you hired a new employee and from the employee’s latest place of employment.
What if a new employee doesn’t have a P45 form?
As we mentioned before, it’s possible a new employee may not have a P45 form. For example, they may have never worked somewhere before, or their old P45 form falls out the window of the current tax year.
In this case, you’ll need such an employee to fill out a Starter Checklist.
Make sharing P45s easy with PayFit
PayFit makes issuing P45s to employees a walk in the park.
On their final payday, an employee will automatically receive their P45 under their employee portal without any further action from you, the employer. No hassle or unneccessary admin work. If you’re tired of struggling with P45 forms, book a free PayFit demo today to see how we can help.