P45(1) Leaver Form

9 October 2017

This article focuses on the P45(1) Leaver, practices currently undertaken by many payroll offices, the potential challenge of in-year filing requirements and also compliance with the relevant regulations.

When is a P45 required?

The Income Tax (PAYE) Regulation 2003 Para 36(2) states that the leaver P45 should be sent to HMRC and the employee:

On the day on which the employment ceases or, if that is not practicable, without reasonable delay.

A P45 must be completed:

  • even if the employee says they will no longer be working
  • for any employee leaving where a P11 (or equivalent) has been created and HMRC has been notified of the start of employment by P45(3) or a Starter Checklist         

However, a P45 should not be completed:

  • if there has never been a requirement to have a P11 or equivalent and if a P45(3) or a Starter Checklist has never been submitted to HMRC.
  • when the employee is a student and has operated P38(S) and no tax has been deducted.

On the date the employment ceases (or soon after) you’ll need to issue the P45 Parts 1A, 2 and 3 to the employee - HMRC now provides a 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.

What if a P45 was issued in error?

If a P45 was issued to the wrong employee or the employee did not actually leave, then the employer should send a letter to the tax office confirming the error. All other parts of the form should be destroyed.

What about Payments after leaving?

It has become common practice for final or termination payments, when they attract Pay As You Earn (PAYE), to be taxed at a 20% Basic Rate (BR) week 1 / month 1 basis - even when the payment is made prior to “the day on which the employment ceases”. This is often done to sweeten the employee a little over the fact that they are losing their job. In many cases, special treatment has also been given with regards to National Insurance – such as only applying 1 week NIC liability. In order to severance the pay, this should be completed on the basis of a payment after leaving and issue of the P45.

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

No. With regards to the regulations - 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 than this 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 (NICs) are assessed on the normal category letter using the normal payment period for the individual. Often this 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.

Can I issue a duplicate or replacement P45?

No - once a P45 has been created and issued then the employer is not permitted to issue another P45 under any circumstance.

If the employee has lost their P45 then they must complete a Starter Checklist form with their new employer.

If an employer makes further payments after the issue of the P45, then they are required to give a letter to the employee confirming the payment details. The letter should include the date of payment; the gross amount, and the amount of tax and National Insurance Contributions (NICs) that have been deducted. Often this requirement may be completed by the issue of a payslip. A copy of the letter can also be sent to the tax office.

What if we made an error on the original P45, can we issue a replacement?

This depends on the status of the submission of the P45 to either the tax office or the employee. If the employer has not actually issued the P45 to the employee or the tax office, then all parts of the form can be destroyed and a new P45 completed.

However, if the P45 has already been sent to the employee or the tax office, then the employer should not issue a new P45 but must write to the tax office (copying the employee) confirming what the errors were.

Compulsory Electronic Filing

If you have 50 or more employees in your PAYE scheme then you should be filing in-year forms online. Penalties will apply from January 2010.

So 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.

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