Small business accounting can be tricky - there’s certainly no lack of documents to keep track of and forms to complete. But if your business has employees, it gets even tougher, as you have to manage payroll and new forms like the P45. Find the answers to some common questions about P45s that will help you keep your business on the right track.
What is a P45?
A P45 is a form that employees receive from their employer when they leave a job. A P45 shows how much tax an employee has paid on their salary so far in that tax year, as well as details of their gross earnings and their tax code.
When an employee starts a new job, they will need to give their P45 form to their new employer. This lets the new employer apply the correct tax code so that the employee pays the right amount of tax to HMRC.
What does a P45 look like?
P45s are four-part documents, made up of a Part 1, Part 1A, Part 2 and Part 3. If you’re generating a P45 for a former employee, you must share Part 1 with HMRC while Parts 1A, 2 and 3 are to be given to the employee. This is how the top section of Part 1A looks:
The former employee will keep Part 1A for their own records and give Parts 2 and 3 to their new employer. It’s also recommended that employers keep a copy of their former employees’ P45s for their records.
Do I need a P45 if I’m self-employed?
If you are self-employed and you stop working, you won’t need to generate a P45 for yourself as P45s are only given to employees, and you would not be an employee of your own business if you’re a sole trader.
However, if you’ve recently become self-employed, you may need information from your last P45 to complete your first Self Assessment tax return. This will tell HMRC how much you earned from your employment in the tax year and any tax you paid through your last employer. HMRC can then calculate the tax you owe from your self-employment. Your employment earnings may push you into a higher tax bracket - or, if your business makes a loss in its first year, you might be able to claim back some of the tax you paid on your salary. Speak to your accountant if you need more help with this.
If you are a limited company director and you stop taking a salary from the company, but remain as a director, you should consult with HMRC or your accountant about whether a P45 should be issued.
What is the difference between a P45 and a P60?
They can be easy to mix up - both P45s and P60s show the tax an employee has paid on their salary in a tax year.
However, a P45 is only issued when an employee leaves a job, while a P60 should be issued at the end of every tax year to staff who are still working for the employer at that time. If you’re an employer, you must provide your employees with a P60 by 31st May each year.
What do I do if my new employee doesn't have a P45?
If you hire a new member of staff and they don’t have a P45 (perhaps because they’ve never been employed before or they’re taking a second job), you may need to ask them to complete a starter checklist. This will provide you with the relevant starting declaration and tax code so that you can set up their payroll profile and your new employee can avoid being put on an emergency tax code. Visit our Knowledge Base for more information on adding a new employee with no P45 to payroll in FreeAgent.
It’s important to check that your new employee’s P45 is valid. P45s are only valid for the tax year that they refer to. If your staff member has had a break in employment, or has been self-employed for a period, you may also have to ask them to complete a starter checklist.
Am I legally obliged to provide employees with a P45?
Yes, when an employee leaves your business, you are legally obliged to provide them with a P45 ‘without unreasonable delay’. Without a P45, your former employee may be given an emergency tax code by their new employer, which could result in them paying the incorrect amount of tax.
What do I do if a former employee loses their P45?
If a former employee loses their P45, you cannot issue them with a new one. Instead, their new employer can ask them to fill in a starter checklist so that they can complete their PAYE payroll.
How do I generate a P45 for an employee?
You may be able to use your payroll software, like FreeAgent, to automatically generate a P45 when an employee leaves your company. If your software can’t produce P45s and you have fewer than 10 employees, you may be able to use HMRC’s Basic PAYE Tools to create the form.
FreeAgent’s fully integrated HMRC-recognised payroll software takes the hassle out of running payroll. By automatically calculating PAYE contributions, and allowing you to file your payroll directly to HMRC, FreeAgent helps to keep you compliant and leaves you free to focus on growing your small business. Discover how FreeAgent can make running payroll a breeze with a 30-day free trial.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.