Whether you’re new to the world of work or looking to start your own franchise in the UK, it’s important to know your P45 from your P46. A P45 is an essential document for both employers and employees, as it shows HMRC what tax is being paid and proves that everything is operating above board.
Here’s a handy P45 definition that will help you to get to grips with how tax is recorded and processed in the UK.
What is a P45?
A P45 is a document that is returned to an employee after they leave work. It includes a number of important bits of information relating to tax. The most important bits are:
- Your tax code
- Proof of tax paid
- Gross pay
As a P45 cannot be replaced, it’s really important to look after your P45 and make sure that you chase it up after leaving a job. Any future employer will need it to make sure that you are put on the right tax code. Without it, you can end up paying extra tax and may find it difficult to claim tax reimbursements.
A P45 is split into a number of different parts. One of them is sent off to HMRC, one is to be given to your future employer and the other is for your records. Even though a P45 is only valid for one tax year, HMRC recommend that you keep the document for up to 22 months. That way you have the proof to back up any tax reimbursement payments if required.
How do I get a P45?
Now that we’ve finished our P45 definition, let’s talk about how you can get your hands on one. Every time you leave work – regardless of whether you resigned voluntarily or were fired – your employer is responsible for returning your P45. It is up to them to inform HMRC that you are departing work and provide all the tax information that will be needed by a future employer.
If you’ve never worked before in the UK, your first employer will get you to fill out a Starter Checklist. This document, which used to be known as P46, collects information that allows HMRC to give you the right tax status. It will ask:
- What your National Insurance number is
- If you are working a second job
- If you are claiming Jobseeker’s Allowance
- If you are paying back a student loan
Why is a P45 important?
With the government cracking down on tax evasion, your P45 is proof that you are paying the right amount of tax. It is just as important for both franchisors and franchisees; both are responsible for processing their employee’s tax payments with HMRC.
By detailing your gross pay, a P45 makes sure that you aren’t caught short by the tax man. It helps HMRC to put you in the right tax bracket and can help you to claim any reimbursements.
It’s also a required document for those who need to claim social welfare. If you are applying for Jobseeker’s Allowance, income support or tax credits, a P45 is mandatory. It can prove that you are out of work or the amount of income that you have received over the tax year.
Can a P45 be amended?
Just like in any kind of administration, HMRC can make mistakes. The problem is that these mistakes cannot be easily rectified. HMRC refuses to replace lost or incorrect P45 forms because it reduces opportunities for tax frauds.
The best thing you can do is fill out another HMRC Starter Checklist when beginning a new job. By doing so, you can highlight any errors such as a misspelt name, address or incorrect date of birth.
If you’re an employer, you can accidently end up sending off the wrong information to HMRC. It could be that:
- You mistakenly register them as leaving work
- You’ve already sent off an FPS (Full Payment Submission), but still owe your employee money
Employers let HMRC know about any changes to their staff’s employment status via FPS. These are sent every month on or after payday and help to process income tax payments. If you need to make changes to an FPS, you can do so by using your businesses’ payroll software.
What if I’ve lost my P45?
If you or your employer lose your P45, there’s not much you can do about it. Once it’s lost, it’s lost.
Your future or current employer will get you to fill out another Starter Checklist to get you back on track. In the meantime, you may be put on an emergency tax code.
What’s an emergency tax code?
HMRC will issue you an emergency tax code when it does not have the right information it needs to establish your tax status. If you have one, there’s a chance you might miss out on some tax-free allowances that you are entitled to.
Depending on the size of your earnings, you will pay 20 or 40 percent tax on what you earn above the standard personal allowance. This currently stands at £12,500.
Though emergency tax codes are commonly issued when you start a new job without a P45, they are also handed out if you are working for an employer after a period of self-employment or if you’re starting a state pension.
If you’re unsure whether you have an emergency or standard tax code, check your latest payslip. If it shows ‘1250 W1’, ‘1250 M1’ or ‘1250 X’, you have been given an emergency tax code and should make the necessary steps to receive a standard one.
What else do I need to start a new job?
Your P45 is not the only document that you will need when entering a new period of employment. You should also expect your new employer to ask for a valid form of ID – such as a passport or driving licence. If you want to get paid, you also need to hand over your bank information so that your employer can pay you from the first pay day.