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The ins and outs of employees starting and leaving

Kate Upcraft, employment tax specialist, looks at the practicalities of employees starting and leaving employment. She touches on the role of the P45, April 2019 changes, national insurance and the ins and outs of saying goodbye.

EmployeesThe average worker has 11 jobs in their working life. If you multiply that by 40 million-plus taxpayers, that’s an awful lot of starters and leavers for UK employers to process. Arguably, it’s the most important activity for any payroll and HR team to get right; correct onboarding means the new employee is reassured they made the right choice in taking up employment, and saying goodbye accurately can be the difference between retaining that person as an ambassador of your company, an ongoing customer or even a returning new starter one day.

HMRC has been concerned for some time that employers are not handling the new starter process correctly as it has stated that half a million new employees are being submitted to HMRC as ‘undeclared’ leading to the default code of 0T/1. Some employers may well take the view that 0T/1 is the most appropriate default code for senior new starters who they know should not have a personal allowance, but that is for HMRC to assess, not the employer. Equally, half a million points to a more likely explanation that onboarding practices are not operating effectively. HMRC has recently said that it is targeting the top 100 offending employers in relation to new starter declarations.

Right first time

Six years ago, with the advent of real time information (RTI), the intention was that both the P45 and P46 would be abolished. The P46 though was replaced with a much more detailed starter checklist and the P45 is still around, albeit only received in around 30% of cases. The problem with the P45 is that HMRC still wants to abolish it, so it is not prepared to spend any time or money updating it with legislative developments. For this reason, it was not amended in 2012 when Plan 1 and 2 student loans were introduced, rendering it insufficient to make the right plan decision, further compounded this April when postgraduate loan collection through payroll commenced.

It’s therefore vital that the starter checklist is completed by all new starters regardless of whether they present a P45 or not.

Where both a P45 and new starter checklist are completed the P45 can be used if:

  • the P45 is in date, for example, the leaving date is not earlier than the start of the previous tax year (if the employee left last tax year and it’s between 6 April and 24 May we don’t use the earnings from last year or the code as there are special rules, see the table opposite);
  • the tax is appropriate to the earnings and code for the leaving date in question (if it is incorrect the new employer should make the necessary amendment to correct the position in their own payroll software so that the error isn’t continued into the new employment); and
  • the tax code is not just a string of numbers, number codes must have a prefix or suffix (where there is none append a T to the numbers).

The following table shows the appropriate codes and starter declarations for 2019/20:

Date of leaving
Start date Code on P45
Starter declaration  Tax code to use
6.4.19 – 5.4.20
On or after 6.4.19
Not BR, 0T, D0 or D1
B Code from P45 including any S or C prefix
6.4.18 – 5.4.19 6.4.19 – 24.5.19
6.4.19 – 24.5.19
Not BR, 0T, D0 or D1
B For L codes add 65, N add 59, M add 71 and drop month 1
6.4.18 – 5.4.19
25.5.19 onwards
Not BR, 0T, D0 or D1
B 1250L/1
Any of the above
Any of the above
BR, 0T, D0 or D1 (or Scottish/Welsh equivalents)
C Code from P45 including any S or C prefix
P45 dated before 6.4.18, ie, out of date P45
On or after 6.4.19
Ignore P45 & just use starter checklist
Use statement A, B or C as indicated or C if not completed
A – 1250L
B – 1250L/1
C – completed by employee BR
C – completed by employer 0T/1
Starter checklist only On or after 6.4.19
N/A Use statement A, B or C as indicated or C if not completed 
A – 1250L
B – 1250L/1
C – completed by employee BR
C – completed by employer 0T/1

April 2019 changes

From the start of the 2019/20 tax year, student loan repayers who took out postgraduate loans in England and Wales begin to repay these through the payroll if they completed their studies/left a course prior to 6 April 2019. Postgraduate loans will be repaid alongside Plan 1 or 2 loans if the individual’s earnings are high enough, as the postgraduate loan earnings threshold is £21,000 with repayments at 6% on earnings subject to national insurance contributions (NIC) above this threshold. The Plan 1 threshold is £18,935 and Plan 2 £25,725.

It is vital that the starter checklist is completed for every new starter, even those presenting an in-date P45, so that the correct undergraduate plan number and any postgraduate loan is set up on the payroll from the first pay period. Failure to get a starter checklist completed will mean repayments will not start on time and you will receive a Generic Notification Service message from HMRC instructing you that a loan, or loans, should be in repayment which will be followed by an undergraduate start notice SL1 or postgraduate start notice PGL1. You will see from the starter checklist that there are two postgraduate qualifications that are treated as undergraduate Plan 2 loans: Advanced Learner Loans and Postgraduate Healthcare Loans – and student loans used to be easy for employers!

Saying goodbye

After the hard work of setting up a new starter you’ll hope their tenure with you is a long one but there will always be plenty of leavers to handle if you’re in certain sectors. When I was payroll manager at Marks & Spencer, we had 20,000 leavers on Christmas Eve each year, so that kept us busy. Sadly, one of the downsides of RTI compared to pre-2013 is that we can’t transmit leaver information until we submit the FPS for the pay period in question. This can mean there is an overlap when the new employer has notified the new starter on their FPS, as their payment date is ahead of the payment date of the old employer who has not reported them as a leaver. It therefore appears to HMRC that the employee has two jobs simultaneously and can lead then to make incorrect coding decisions.

Always advise new starters to check for the appropriateness of coding changes as they change employments. If they have activated their Personal Tax Account, the email alert will come to them ahead of the code going to the employer which will allow them to make contact with HMRC to get the correct code to the employer.

Given the elapsed time in reporting overtime there can often be a need to make a payment after leaving – which means after the P45 has been processed. Where this is the case, payroll software should default the tax code to 0T/1 on the basis that the personal allowance has transferred to the new employment.

National insurance

I’ve not talked much about NIC in this article as space doesn’t permit, but suffice to say one of the most common mistakes that occurs in payroll software is with starters and leavers where payment spans two pay periods. This can be either because the starter missed the prior period’s payroll run, or it’s a late leaver who has some basic pay and then overtime covering two pay periods.

Where either scenario happens, the earnings must be allocated to each pay period and two separate NI calculations must be made that are then added together. The two thresholds are those that applied to the tax year in question and the employee’s previous pay frequency if the final payment is a mix of regular (basic pay) and irregular (bonus, holiday, overtime) payments. Only in instances where there is only irregular pay and it is more than six weeks after the leaving date does the NI frequency revert to the weekly threshold even if the employee was not previously weekly paid.

About the author

Kate Upcraft is an employment tax specialist and director of Kate Upcraft Consultancy Ltd