In an ideal world, when you take on a new starter it will be a relatively straightforward process, and it is important that this individual – who has their experience in your organisation still all to come – gets paid correctly and at the right time.
However, problems can occur and there are various issues to resolve even before their personal information goes through to the payroll department for processing.
Employed or self employed?
The first thing to sort out is whether your new starter is definitely going to be an employee or is actually self employed?[1] It is an employer’s responsibility to decide on the correct employment status of someone who works for them. Getting this wrong can result in paying extra tax and National Insurance Contributions (NICs), paying interest and possibly facing a penalty. A person's employment status depends on the terms of the contract between you. A contract of service usually makes them an employee and a contract for services usually makes them self employed.
However if in doubt, as a worker can be both employed and self employed at the same time, HMRC has an employment status guide[2] and they also have an interactive employment status indicator[3] and if neither of these makes it clear you can request a written opinion from HMRC’s status customer service team. You can appeal against this decision but in the meantime you would treat the worker as an employee.
Agency workers
Your worker could also be engaged by an agency which can be ideal as they handle all the administration including paying their wages; however it will tend to be more expensive than employing someone directly. There are also the new Agency Workers Regulations (which come into force in October 2011)[4] to consider. The regulations will mean that after 12 weeks in a given job, an agency worker will be entitled to equal treatment (at least the basic working and employment conditions that would apply to the worker concerned if he or she had been recruited directly by that undertaking to occupy the same job).[5] The CIPD has published useful guidance[6] to help businesses prepare for the new regulations.
Right to work in the UK
You should also be aware that individuals must have the right to work in the UK. The UK Borders Agency published new guidance[7] in November 2010 for employers to help prevent illegal working in the UK. It will help employers understand the status of asylum seekers, refugees and those with humanitarian protection. The guidance highlights what documents you should ask prospective employees to produce to ensure that they have such status and that they can lawfully work for you. All employers in the UK have a responsibility to prevent illegal migrant working. If you fail to do this, you may be liable to pay a civil penalty and if you knowingly employ an illegal migrant worker, you may face criminal prosecution, which could result in an unlimited fine and/or a maximum two-year prison sentence.
But there is no need to catastrophise unduly! Let us assume that it is a straightforward employee that you are putting on the payroll. The rest of this article covers the basic processes that you should follow but full guidance is available from HMRC. [8]
P45
In an ideal world every employee would have a P45 in hand on their first day but we know in reality that is not always the case. The new employee may have another job or their old employer has not yet given them their P45, they could have mislaid it or be a student who is only going to be working for you during their holidays or indeed it could be that this is their first job.
If you do receive the P45 then of the four-part form you should be given parts 2 and 3 where you should check that the NI number has been entered. If there is no NI number you need to ask your employee to look at any other documentation they may have such as a P60 and if they have never been issued an NI number then they will need to contact their Jobcentre Plus office to apply for one. There is also a NI number tracing service through HMRC, details of which can be found on their website (see note 8 below).
So back to checking the P45 – you will need to check that items 6 and 7 of part 3 agree with the corresponding entries on part 2. If they don’t you must contact your tax office immediately. Where the P45 is for the current tax year, check that the ‘Total tax to date’ at item 7 is correct. The P45 checker tool in the calculator section of the Employer CD-ROM (sent when you register as an employer) can do this for you, or you can use the pay adjustment and tax tables. If you are using the P11 calculator on the CD-ROM the check will be done automatically for you when you enter the details of your new employee on the database.
If you're a new employer, or have been in business for less than three years, and have problems checking the P45 you can call HMRC’s New Employer Helpline.[9]
If you find that the P45 figures are wrong you'll need to enter the correct figures in part 3 of the P45 and use these when setting up your employee's form P11 deduction working sheet or equivalent electronic or paper record.
When you've checked the details on the P45, fill in boxes eight to eighteen on Part 3 and send it to HMRC. At item 12 make sure you enter the correct tax code. It may not be the same as the one shown on the employee's form P45; for instance if their P45 is from an earlier tax year. HMRC has a useful guide you can use: ‘New employee: using the right tax code’.[10] At item 13 make sure you enter the correct tax figure if you found it was wrong during the P45 check.
Note that you must keep part 2 of the P45 for at least three years after the end of the tax year to which it relates. It is also worth mentioning that if your new employee was unemployed and claiming benefits then it is good, ethical practice to advise them that they'll need to contact their Jobcentre Plus office.[11]
P46
If your employee does not have a P45 then they must complete a P46 unless they are a student working for you solely during their holidays or they intend to work for you for one week or less with no expectation of coming back in the current year.
If you are filing the P46 online you can either ask the employee to complete part 1 or request the information needed for it and you can complete it on their behalf. It is up to you if you require a signature but best practice would be to always obtain one where possible. Your employee must provide you with the P46 information before their first pay day. If not then you must complete this section to the best of your knowledge on their behalf and use code BR on a cumulative basis which may result in them paying more tax than necessary. It is important that you make them aware of the consequences of not providing the information required in time for you to complete the P46.
You must also show the date of birth and gender on all P46 forms.
Which tax code should you use?
Part 2 is to be completed by the employer which gives details about your PAYE scheme and the tax code you will be using for the employee.
Depending on whether box A, B or C was ticked in Part 1 will determine which tax code to use.
A: 647L cumulative
B: 647L week 1/month 1
C: BR cumulative
If no box has been ticked you should use BR cumulative.
Do you need to send the P46 to HMRC?
Whether or not you need to send the P46 to HMRC or keep hold of it depends on whether or not the employee's earnings are equal to or above the NICs Lower Earnings Limit (LEL). If the employee ticked box A or B and their earnings are less than the LEL then you would keep the P46 for future use. Bear in mind that even if you don't need to send the P46 to HMRC right away you still need to keep a record of your employee's name, address and the amount you pay them.
If the rate of pay increases at a later date to be equal to or more than the LEL you should prepare a form P11 or equivalent record, deduct and record NICs in the normal way and send the P46 to your tax office on your employee's first pay day.
Note that if the employee ticked box A then you should deduct and record tax in the normal way using the emergency tax code on a cumulative basis.
If they ticked box B then you should deduct and record tax in the normal way using the emergency tax code on a week 1/month 1 basis.
If they ticked box C then you should deduct tax using the basic rate code.
There is of course a box D and if this is ticked then you should start making student loan deductions from the next pay day. This is a whole other complex area of which HMRC has comprehensive guidance for employers on its website.[12]
What should you do if you receive a P45 after you have completed a P46?
If an employee gives you a P45 after you have completed a form P46 the action you’ll need to take will depend on whether or not you have received a new tax code from HMRC since your employee started with you.
If you have received a new tax code since the employee started with you then if box D is ticked on the P45 start deducting student loan repayments, unless you have received notification from HMRC to stop. Destroy the P45 part 3 and do not include the pay and tax figures shown on it in your tax calculations. The new code received from HMRC, together with any pay and tax included, replaces the form P45 part 3.
If you have not received a new tax code form HMRC since the employee started then as above if box D is ticked. Use the code on the P45 part 3 providing it is for the current tax year - and carry out the same checks as described in the earlier section If the P45 part 3 includes previous pay and tax details and your checks confirm these are correct, add them to any pay and tax details since the employee started working for you. If this results in less tax being due to date than the total deducted so far, repay the difference to your employee. If you have insufficient other deductions available to cover the repayment, you may be able to claim funding for a tax refund for your employees through HMRC.[13]
If your employee has previously had a National Insurance number but doesn't know what it is and you're sending a P46 to your tax office, they'll automatically trace the number and let you know what it is. You can carry on paying an employee even if you haven't got their National Insurance number but you must keep a record of their name, address, date of birth and gender.
Improving the operation of PAYE
HMRC is currently consulting on major changes to the way PAYE, NICs and statutory deductions payments are reported. The consultation document can be viewed on HMRC’s website here and the CIPP’s summary and views can be read here
HR communication
We have covered some of the basic form filling and checks and HMRC requirements 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. It is likely that HR will deal with a lot of new start information so it is imperative that they pass on the relevant detail to payroll as soon as possible and hopefully within pay run deadlines. I don’t need to tell you that there is nothing more frustrating to deal with than an employee who has not been paid!
[1] See also Lorraine Owens’ article ‘Beware the categorisation of earners rules’, The People Bulletin, 5 November 2009.
[2] www.hmrc.gov.uk/paye/employees/start-leave/status.htm
[3] www.hmrc.gov.uk/calcs/esi.htm
[4] www.legislation.gov.uk/uksi/2010/93/contents/made
[5] See also Stuart Chamberlain’s article ‘The wheels of regulation’ in this issue of The People Bulletin
[6] www.cipd.co.uk/NR/rdonlyres/F5FE1F53-27AC-4F62-8772-FB9B3550E1B6/0/5400_Equaltreatmentforagencyworkersguide.pdf
[7] www.ukba.homeoffice.gov.uk/sitecontent/documents/employersandsponsors/preventingillegalworking
[8] www.hmrc.gov.uk/paye/employees/index.htm
[9] http://search2.hmrc.gov.uk/kbroker/hmrc/contactus/search.ladv?sr=0&as=1&cs=ISO-8859-1&sc=hmrc&sf=&sm=0&nh=50&ha=34&tx0=49646&fl0=__dsid:&tx1=2038&raction=view
[10] www.hmrc.gov.uk/paye/employees/start-leave/tax-codes.htm
[11] www.direct.gov.uk/en/Employment/Jobseekers/ContactJobcentrePlus/DG_186347
[12] www.hmrc.gov.uk/paye/payroll/day-to-day/student-loan.htm
[13] www.hmrc.gov.uk/employers/payefunding.htm