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What is a P45? A guide for small business owners

July 7, 2022
If you’ve recently left previous employment to start your own small business, odds are you received a P45 alongside your final payslip.You might not have given much thought to it when handing it over to HR departments before starting a new position. However, as a business owner looking to take on your own cohort of employees, knowing what a P45 is and what it’s used for is crucial not only for onboarding new members of staff, but for waving goodbye to them too.In this article, we’ll be covering everything you need to know about the P45, including what it is, what information you can expect to find on a P45 and what they’re used for.

What is a P45?

A P45 is a form issued by an employer when an employee leaves a job, and is used by employers to get all the tax and payroll information of the new employee during the onboarding process.
Officially titled ‘Details of employee leaving work’, this form breaks down the total amount of tax an employee has paid on their salary within the current tax year (between 6th April and 5th April) and is broken down into 4 parts:

    Part 1 is sent to HM Revenue and Customs (HMRC)Part 1A is kept by the employee for their own personal recordsPart 2 and 3 are given to the employee’s next employer, or to Jobcentre Plus if they’re not working
Keep in mind that issuing a P45 to an employee when they leave is a legal obligation, regardless of whether they left for a new job or were dismissed or made redundant.

What information can I find on a P45?

If your newest hire hands you a P45, you can expect to find the following information:
    PAYE reference number Name and other personal details of the employee National Insurance number Leaving date Employee’s tax code at leaving date Whether student loan repayments are to continue (this is a yes or no box, not an amount) Employee’s pay and tax deducted across their time with the employer issuing the P45 Employer’s name and address
If you’re the one issuing the P45, you should be able to find all the relevant information needed within your payroll records.
It’s also worth noting that you don’t need to include your ex-employee’s National Insurance contributions (NICs) or pension contributions when filling out this form.

What are P45s used for?

Since a P45 form is a summary of an ex-employee’s tax and payroll information, they can be used in quite a few contexts.Issued when an employee leaves a company, the information in the document is passed on to the employee’s new employer when they get a new job, or to Jobcentre Plus if the employee is not working.This information ensures that the employee stays on the correct tax code. Without a P45, the employee will be put on an emergency tax code when starting their new job, and as a result could end up paying more tax than they owe. While this money can be reclaimed from HMRC at the end of the tax year, this means additional admin for the ex-employee’s new employer.As for employees between jobs, P45s can be used to get a tax refund if they meet the following conditions:
    Were dismissed or made redundant part way through the tax year Were paying tax through Pay As You Earn (PAYE) Are currently unemployed
The amount they’ll be able to reclaim will depend on:
    How much they’d earned since the start of the tax yearHow much tax they paid on those earnings, alongside any other income
For employees retiring from work, your ex-employees will need to hand their P45s over to pension providers to ensure they aren’t paying too much tax on any withdrawals made from their pension pots.

What if my employee doesn’t have a P45?

If you’re onboarding a new employee who doesn’t have a P45 — for example, this is their first job and haven’t had a previous employer to give them a P45 — you’ll need to ask them to fill out HMRC’s Starter Checklist.

How long do I need to keep ahold of P45s?

Since a P45 is a tax record, any P45 should be kept by the employee, the employer generating the P45 and the new employer for 6 years from the end of the tax year in which it was issued.HMRC can, however, conduct retrospective checks for up to 20 years after its issue, so it might be ideal to hang onto them for a bit longer.

How do I generate P45s for my employees?

When generating your employee’s final payslip, you should also be able to generate a P45 using your payroll software. If you don’t have payroll system that supports P45 generation, you can use HMRC’s Basic PAYE tools or, if you’re exempt from filing online, you can contact HMRC to order paper forms.

Alternatively, you could make the switch to Ember. Not only can you automate your payroll at the touch of a toggle, but you can auto-generate P45s, P60s and P11D forms whenever you need them.

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