[Switch to the current edition of Connection »]

Simon Parsons on New Starters

Simon Parsons on New Starters

There has recently been a certain amount of confusion over New Starters, especially the following areas:

• What should an employer do with regards to setting them up on the payroll for tax purposes?
• How are National Insurance Contributions to be calculated?

New Employee: preventing illegal working IANA 2006

Employer needs to be assured that they meet the Immigration, Asylum and Nationality Act 2006 (IANA 2006). This requires verification of certain documents prior to the commencement of employment and other every 12 months henceforth. It is evident that a number of employers are continuing not to do this. If it is later proved that an employee is working illegally, then fines are expensive.

New Employee: Applying Income Tax (PAYE)

New joiners should present the employer with any P45 given to them. The challenge often is that they don’t have have and won’t have one, they had one but lost it, or the previous employer has not yet given it to them.

For those that do not present a P45, then there is a requirement for the employee to complete a P46, to look at the questions and tick the relevant box,

• A (operate emergency tax code cumulatively),
• B (operate the emergency tax code non-cumulatively),
• C (operate BR-basic rate cumulatively).

It is evident that some employers do nothing. They either do not ask for the P45 from the employee or equally they do not ask for a P46.

Statistics from the HMRC show that there are significantly more P45(1) forms issued to employees than there are P45(3) processed by new employers. The majority of new employments are having records created via the operation of the P46.

If an employee fails or refuses to supply the employer with a P45 or P46, then the employer is obliged to undertake the P46 process itself. Generally this would be ticking Box C and operating basic rate BR tax code cumulatively and submitting the P46 to HMRC following the first payment. The reality is that this is often not happening.

Of course, if box A or B is ticked and the earnings of the individual are lower than the Lower Earnings Limit (LEL) for NICs, there is no requirement to submit the P46 to HMRC by the employer until there is a pay exceeds the LEL.

So if you are not yet collecting a P45 or issuing and collecting P46, get your act together and comply with your legal requirements. It will lead to a far happier HMRC experience. Failure will lead to penalties.

If you are using electronic systems to exchange the information with HMRC and have a dependency on Works Numbers being correct, then ensure that the P46 and P45(3) reflect your correct works number.

First Period Pay & National Insurance Contributions (NICs)

The other difficulty: how to calculate NICs on first payment. The HMRC CD Rom does not appear to be helping. New guidance points employers to using the CD Rom to check calculations. Be warned, they are not always correct and it doesn’t cover all normal circumstance.

The requirement is found in HMRC guide CWG2 and relates to compliance with Social Security Law:

“If the interval between and employee starting work and the first pay day spans two or more earnings periods...work out NICs on the earnings due for each period separately using the normal earnings period. Use the contribution rates and limits current at the time the earnings are actually paid”.

This even applies where the earnings span two tax years and may create 13 months or 53 weeks of NIC earnings bands and is exactly correct.

So if the employee is due a portion of money from the last pay period but this missed the payroll deadline and it is paid together with the next period earnings as one, there is a requirement to split the earnings for NIC calculations. Good software and service will do this automatically. Many (including the HMRC CD Rom) will not and will require tweaking!

In Summary

Review your new starter processes, ensure that you are ensuring that employees are working legally, ensure that you receive the P45 and if available, give them and have them complete a P46. Ensure that start period NICs are calculated correctly especially where earnings may cover more that a single period (even if only an additional part period).