Advice from Simon Parsons...

P45 Leaver processes under challenge!

Do you have 50 or more employees in your Pay As You Earn (PAYE) scheme? If so, do you already have in place a means to undertake in-year filing, or are you in the last stages of implementation? If not… then you have pretty much run out of time!

Throughout this article we focus on: the P45(1) Leaver, practices that are carried out by many payroll offices, and the potential challenge of in-year filing requirements and also compliance with the relevant regulations.

It has become the usual practice for final/termination payments to be taxed at a 20% Basic Rate (BR) on a week 1 / month 1 basis - and this is even when the payment is made prior to the day on which the employment ceases.

So… what is the reason for doing this?

Well, this is often done to sweeten the employee a little over the fact that they are losing their job. In some situations, special treatment has been given with regards to National Insurance, such as only applying 1 week NIC liability. This is often done on the basis of a payment after leaving and after issuing P45s or to reconcile the thinking of “that is what should happen to severance pay anyway - because my tax office told me so”.

If the day the employment ceases is in the future, is this correct?

With regards to the application of the regulations then no. The payment is not after leaving, and equally the P45 should not have been issued yet in accordance with the regulations.

HMRC systems have been changed to no longer allow a Leaver P45(1) with a date of leaving more than 30 days into the future. Any messages received with future dates contained that extend further will be rejected as being in error. The reason being is that the P45 should not yet have been issued to either HMRC or the employee.

The further challenge to some common practice is that all payments that attract PAYE, up to the point of the date the employment ceases, should be assessed on the employee tax code applicable at the point of payment. Equally National Insurance Contributions are assessed on the normal category letter using the normal payment period for the individual. This often will not be BR and the employee may find themselves assessed at the Higher Tax Rate of 40% on elements of this lump sum payment.

In light of compulsory in-year filing, employers may want to assess and review their leaver and termination payment practices to ensure that they comply with the regulations and the in-year online filing requirements.

When the employee reaches his/her leaving date, you will be required to complete a P45:

• even if the employee says they will no be working when they leave
• for any employee leaving for where a P11 or equivalent has been created and the HMRC have been notified of the start of employment either by P45(3) or P46 at anytime in the past

Don’t complete a P45:

• if there has never been a requirement to have a P11 or equivalent and where the employer has never submitted a P45(3) or P46 to HM Revenue & Customs
• when the employee is a student who the employer has been operating a P38(S) and no tax has been deducted

Remember!

Issue the P45 Parts 1A, 2 and 3 to the employee on the date the employment ceases (or soon after)  - HMRC now provide version of the paper form for electronic submitters to enable the employer to continue to issue the relevant employee parts. Send P45 Part 1 to HMRC electronically. This even applies if the last employee payment made was some time before.

A quick reminder!

It's important to get vital additional information from new employees, such as; employee address, gender and birth date. It’s also worth noting that the Income Tax (PAYE) Regulations 2003 Para 42(7)(f) & 46(3)(c) state that employers must provide HM Revenue & Customs with an employee rsquo;s address at the time that they notify them that the an employee starting employment.