PAYROLL
Tackling tax codes for new employees
The Alliance’s Nicola Hooper talks tax codes and the details needed for new employees being added to payroll
Nicola Hooper is a payslip officer for the Alliance’s payslip service, responsible for the day-to-day running of the service.
Payroll is a complex area of legislation that’s constantly changing. Not only that, but you need up-to-date knowledge and access to HMRC-approved software to run and submit payroll.
As well as this, though, it’s also essential that you understand why your software is applying various tax codes and deductions, not only so that you can explain it to staff but so that you can spot errors, too.
It’s worth considering using a payroll specialist such as the Alliance’s payslip service for peace of mind that you are getting it right first time: bit.ly/EYA-payslip.
As members, you also have access to Law-Call, employment law specialists that can help with employment law questions: bit.ly/Law-Call24.
New employees
When taking on an employee, before you can run PAYE, you’ll need some details:
Either
A recent P45 (current year) that tells you the year-to-date amounts the employee has earned so far this tax year, any statutory deductions and a current tax code. From this, you’ll be able to set the employee up on the correct tax code and ensure that all year-to-dates from previous employment have been entered.
Or
A starter checklist, available from HMRC (or you can use your own version): bit.ly/PAYEstarter-checklist – from the checklist, you’ll be able to identify which tax code to use.
Tax codes
If the employee has worked in this tax year, then you should start with emergency tax code 1257L M1, 1257L W1 or 1257L X, which are temporary. HMRC will usually update the tax code when you or your employee provide the correct details, though this can take up to 35 days. If the change in circumstances means that the employee hasn’t paid the right amount of tax, they’ll stay on the emergency tax code until they have paid the correct tax for the year.
The numbers in a tax code tell you how much an employee can earn in that tax year, tax-free. The taxes will be calculated cumulatively – which means that the tax collected in one month is reliant on how much was taken the month before and so on. The tax code and year-to-date amounts from previous employment are also factored into this.
The letters in a tax code refer to the employee’s situation and how it affects their personal allowance.
■ M means they receive marriage allowance (the employee receives a transfer of 10% of the partner’s personal allowance)
■ K at the beginning of a tax code means that there’s income not being taxed elsewhere that’s worth more than the allowance; this usually happens if an employee has not paid enough tax in a prior year.
Tax codes sometimes change during a tax year. This usually occurs if your employee has an income elsewhere. You should ensure you’re checking for updates regularly – your software may help you to do this with a direct link to HMRC.
If you think a tax code may be wrong, you should ask the employee to check this with HMRC.
Student loans may need applying from the starter checklist or P45:
■ Graduate loans are 9% of income over the lowest threshold out of the plan types they have. There will only be a single repayment taken each time they get paid. Postgraduate loans are calculated at 6%.
■ There are 5 plans and a postgraduate plan, information on plans can be found at bit.ly/student-loan24. Employees only pay back the loan if their income goes over the weekly or monthly threshold for the plan. If you paid a bonus or overtime, this may cause them to pay back more than the annual allowance, meaning that an employee can ask for a refund at the end of the tax year if their annual income is less than the yearly threshold for the plan.
More information on tax codes can be found at bit.ly/tax-code-update.
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