Individuals will leave their jobs for all kinds of different reasons. They could move on of their own accord, leave due to ill health, reach retirement age and choose to retire, be made redundant or even face a TUPE transfer to another business. There are various complex elements to consider when processing information for employees who leave your business.
There are two very fundamental payroll principles attached to all types of leavers:
- The requirement to calculate and complete the final payment due as quickly as possible; and
- To make absolutely certain that the payroll records are amended so that no further payments are made to the leaver.
One of the biggest costs and frustrations to employers is when employees are overpaid when they leave. There are a number of reasons that this could happen, one of the most common being information not reaching the payroll department in time. Recovering overpayments is a time consuming and costly process and there are no guarantees that you will get the money back.
Under the Employment Rights Act (1996)[1] an employee has the right not to suffer unauthorised deductions.
‘(1) An employer shall not make a deduction from wages of a worker employed by him unless —
(a) the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker’s contract, or
(b) the worker has previously signified in writing his agreement or consent to the making of the deduction.’
It is important to have detail of how overpayments will be dealt with in an employee’s contract of employment. This will not only reduce the risk of monetary loss to the business but ease the administrative burden of trying to get an overpayment back from an employee after they have left.
Basic procedures
Calculating the employee’s final pay is priority, including any outstanding entitlement to annual leave, overtime and bonuses etc. Employees will be just as disgruntled if their last pay packet is not received promptly and of course calculated correctly. There is then, of course, the inevitable form filling to do when an employee leaves, the key one being the P45. All employers have a legal obligation to complete this form and it should be completed for any employee that you have completed a deductions working sheet (form P11) for.
When filling in a form P45 make sure you use the A4 size four-part version and not the now discontinued old A5 size. If you have more than 50 employees then you must ensure that the form is sent to HMRC online. From April 2011 this will be mandatory for all sizes of employers (apart from the very few who have been granted an exception).
The basic information you are required to include on the P45 are your employer PAYE reference, the employee's name, address, national insurance number, date of birth, gender, works/payroll number, the employee's date of leaving and their tax code. If you have been previously told to make student loan deductions then you should enter a ‘Y’ in box 5 headed ‘student loan deductions’. However, if you have received a stop notification for this employee then do not enter ‘Y’ in the box.
You will also need to include details of the employee's earnings and tax deductions. If the employee is on a cumulative tax code, then you'll need to provide both their overall pay and tax totals for the tax year so far, including any from previous employments during the year and their pay and tax figures relating only to their work for you during the tax year, if these differ from the employee's overall totals for the year. If the employee is on a week 1 or month 1 code, then provide their tax and pay figures relating only to their work with you in the current tax year.
You must give parts 1A, 2 and 3 to your employee when they leave and send part 1 to HMRC as soon as possible.
P45 anomalies
Completing the P45 is straight forward but it is beneficial to know what to do in other certain circumstances. For instance, if you had sent a P45 Part 1 to HMRC and you either realise you have made a mistake on the form or the employee doesn’t actually leave then you need to send a letter to your PAYE tax office and to the employee confirming details of the mistake. You should then destroy all other parts of the form.
If an employee claims to have lost or never received a P45 then under no circumstances can you provide them with a duplicate. Similarly if you make further payments to an employee after you have issued the P45 then you cannot provide another one with altered information. You should, however write to the employee and your PAYE tax office confirming the payment details which should include the date of payment, the gross amount and the amount of PAYE and national insurance contributions (NICs) deducted. You do not need to notify HMRC at the time of making the extra payment, but you must ensure that it is recorded on form P14 (end-of-year summary) at the end of the tax year.
There are quite often circumstances where no forwarding address has been left for the employee. In this situation you would complete the P45 as normal and send part 1 to HMRC and retain the other parts in case the employee does contact you in the future.
New 0T code from April 2011
If an employer makes a payment to an individual after leaving their employment and after the P45 has been issued, current guidance states that you have to deduct tax at basic rate (BR) on any payments made to an employee after the employment has ceased, if they have not been included in their form P45. If the individual is liable to tax at the higher or additional rate however this will result in an underpayment that HMRC would have to collect from the employee. From 6 April 2011 HMRC will be changing the code they authorise you to operate from BR to 0T (no personal allowance and operated non-cumulatively). Code 0T will ensure that tax is deducted from payments at the basic, higher and if appropriate the additional rate of tax.
How to deal with the NICs in this situation is a different matter altogether and guidance can be found within chapter 1 of the CWG2 Employer Further Guide to PAYE and NICs.
Students
If the employee leaving is a student under the P38(S) procedure where they were only working for you during term time and have not had any tax deducted, then you are not required to complete a P45. You must however complete the employer’s statement on form P38(S) or equivalent records and keep this form for at least three years.
P60: End-of-year certificate
An employer must provide a form P60 to each employee by 31 May as long as they are or were working for you at the end of the previous tax year and for whom you have completed a P11. The P60 confirms an employee's final tax code and shows their total pension and/or earnings for the year, as well as the year's total tax deductions and NICs. Employees should keep form P60 as a record for self-assessment purposes.
Electronic P60s
The CIPP has lobbied for many years for HMRC to permit employers to issue electronic rather than paper P60s to employees. With the help of member’s essential survey feedback evidence, HMRC finally agreed in March of last year, to amend the PAYE regulations[2] to allow employers to issue electronic P60s where they choose to do so. The regulations were amended from 6 April 2010 which means that the first electronic P60s employers can provide will be those for 2010/11.
Employers should ensure agreement with their employees, as they do currently for electronic payslips, before insisting on electronic P60s and ensure all employees have access to their P60s should employers choose to use this method of distribution.
HMRC published a bulletin in August 2010[3] which highlighted that although the electronic means by which the P60 information is delivered will not require approval from HMRC, the paper output arising from that electronic information will be classed as a ‘substitute form P60’ so the proposed content will require HMRC approval and will be subject to the same approval procedure used for substitute paper forms P60. Software developers and employers will therefore need to send two drafts or proofs of the proposed form to the following address for approval:
HM Revenue & Customs
Customer Information Team
Room 54 1st Floor New Wing
Somerset House
Strand
London WC2R 1LB
Any substitute P60s which arise from the output of an electronic P60 must carry the text ‘this is a printed copy of an eP60’. This must be at the top of the form near to the form title, ‘P60 End of Year Certificate’ and in an acceptable font size, no smaller than point 10. Duplicate P60s for the tax year 2010-11 onwards, irrespective of whether they are provided on paper or electronically, will no longer need to carry a ‘duplicate’ annotation. Employers will not be required to take any additional or different action in respect of subsequent, or multiple prints of the electronic P60 information. Each printout will be a copy P60 in its own right.
P11D
Form P11D (if applicable) is used to tell HMRC about the value of any benefits in kind given to an employee during the tax year such as a company car. These benefits only need to be declared if the employee has earned at least £8,500 during the year, including the value of the benefit/s. You don’t have to give an employee a P11D when they leave, however employers have a legal requirement to inform them of the details that are included on the form, so it may be an easier option to give an employee a copy of the P11D when you send it to HMRC.[4]
Statutory payments
An employee could also leave whilst in receipt of statutory payments and there are different rules depending on the type of payment.
If you are paying Statutory Maternity Pay (SMP), Statutory Adoption Pay (SAP), Ordinary Statutory Paternity Pay (OSPP) or Additional Statutory Paternity Pay (ASPP) your liability does not end when an employee leaves. You must continue to pay the SMP/SAP until the end of Maternity/Adoption Pay Period, the OSPP for the one or two weeks of entitlement and the ASPP until the end of the Additional Paternity Pay Period. Your liability would only end if the employee went to work for another employer during any of the pay periods.[5]
If the employee is in receipt of statutory sick pay (SSP) and are still sick when they leave then you must issue form SSP1 (or your own version) which explains why you will not be continuing to pay SSP and enables the individual to claim benefit. If you have any original medical evidence then you should retain a copy for your records and give the original documents back to the individual. ‘Employers should be aware that if HMRC find that you have dismissed an employee to avoid paying SSP they can decide that you are still liable to pay SSP as if the contract had continued.’
Full guidance on the rules regarding statutory payments (from April 2011) can be found within the following links:
(E15) Employer Helpbook for Statutory Maternity Pay
(E16) Employer Helpbook for Statutory Adoption Pay
(E19) Employer Helpbook for Ordinary and Additional Statutory Paternity Pay
(E14) Employer Helpbook for Statutory Sick Pay
Space does not permit all the detail on the different types of leavers so the following is a summary of the main ones outside of ordinary resignations.
Particular leaver circumstances
Pensioners
If you are to start paying a pension to a retiring employee (or to one who will be staying in employment) then you do not treat them as leaving your employment so you do not have to complete a P45. You would complete a P46(Pen) instead and send this to HMRC and also give the employee a copy for their information. You could also find yourself in the position of having to pay a pension to a dependant of a deceased employee where you would also complete form P46(Pen), ensuring that the recipients details go on the form, not those of the deceased. It goes without saying that great care must be taken when dealing with leavers of this nature as the payroll department is likely to deal with bereaved relatives in relation to outstanding pay and pension payments. If a pension is to be paid by the trustees of a pension fund to someone leaving your employment then you would treat the employee as a normal leaver.
TUPE transfers
The Transfer of Undertaking (Protection of Employment) Regulations (TUPE) 2006[6] state that, broadly speaking, the effect of the TUPE regulations is to preserve the continuity of employment and terms and conditions of those employees who are transferred to a new employer when a relevant transfer takes place. The original employer must supply information about the transferring employees to the new transferee by providing what is described as ‘employee liability information’. Data protection is an important consideration when giving personal details about an employee. Correct consultation is also vital as failure to do this could result in liability for the payment of compensation which may be up to 13 weeks' pay.
Redundancies
Employees who are made redundant are entitled to various payments that would make up the final termination payment. The two main elements are Redundancy Pay and Pay in Lieu of Notice (PILON). PILON is the description of a compensation payment made for loss or damages as a result of termination of employment when the employer is in breach of the terms and conditions of employment. Most commonly this would be where the employer terminates the employment without giving required notice as stated in the contract of employment. The payment covers pay and benefits that would have been due had the employee worked. There are also complex rules on the tax treatment of redundancy payments and again adherence to the consultation process for employees is vital.
Ill health
If an employee's illness is long-term or progressive, they may count as disabled under the Disability Discrimination Act 1995 and as of 1 October 2004 all employers must make reasonable adjustments to premises and working practices to accommodate the needs of any disabled employees. An employer is likely to face claims of constructive dismissal by employees if regulations are not adhered to.
Death in service
If you encounter the unfortunate situation where an employee dies then a P45 must be completed and a D entered in the box at the bottom of the form to indicate the death of the employee. Part 1 only is then sent to HMRC either on the day the death is known or as soon as possible after this without unreasonable delay. This also applies to the death of a pension recipient. Guidance is also followed in relation to PAYE paying particular attention to the fact that if an employee has died and a payment is due either on or after the date of death, no employee or employer NICs are due on the final payment.
HR liaison
As I explained in my previous article, Getting started’[7], some of the basic form filling, HMRC requirements and other considerations have been covered but there is one vital area that can not be overlooked and that is the importance of good communication between the HR department and the payroll department. This is not only to avoid costly overpayments; HR will deal with the majority of consultation and grievances around TUPE, redundancy, ill health, dismissals etc. so it is imperative that they liaise with payroll throughout the process to also avoid the risk of litigation.
[1] www.legislation.gov.uk/ukpga/1996/18/contents
[2] http://www.legislation.gov.uk/uksi/2010/668/contents/made#Backf00005
[3] http://www.hmrc.gov.uk/paye/employer-bulletin/bulletin36.pdf
[4] See also ‘Get it right first time’ by David Daly in The People Bulletin, 4 June 2009
[5] See also, ‘The family way’ by Deborah Nathan in The People Bulletin, 24 September 2009
[6] http://www.legislation.gov.uk/uksi/2006/246/contents/made
[7] http://www.apbusinesscontacts.com/the_people_bulletin-pb_6/started.aspx