What is P45 Form And Why is it Important in The UK?

When an individual becomes associated with an organisation, they are required to present their new employer with a number of documents that contain all the necessary information about them. Notably, among the documents, one of the most important forms is the P45 form. What is the P45 form? A P45 is a vital document in the UK tax system dealing with the employee’s departure from employment. It is essentially relevant to employers.

Hence, this blog intends to be a complete guide for employers about what is P45 form and why it is important in the UK.

 

 

What is P45 Form?

At its core, whenever an employee leaves a job, their employer must issue them a P45. It is a vital form containing details of an employee’s salary and the taxes paid during the tax year. Further elaborating, the P45 form is issued by an employer in order to provide a detailed record of an employee, such as outlining the details of the employee’s earnings and the income tax deductions in the tax year till the time of their leaving date.

Furthermore, it is an official certificate that an employer is responsible to give to their employee upon the termination of their employment.

Who Issues The P45 Form?

It is noteworthy that as an employee, the P45 form is not just confined to the job you have left. Instead, once you have left a company, this form is passed on to your new employer. More importantly, the responsibility to give you the P45 document lies with your ex-employer without you having to request it. Ordinarily, it is generated automatically via the company’s payroll system. However, if an employer fails to issue the form, you have the right to ask for it, or you can ask to have it sent to your new employer’s address.

Alternatively, in the event your employer does not or fails to issue you the P45, you can contact HMRC. Fortunately, HMRC will contact your ex-employer to obtain the P45 on your behalf. It may also issue you a tax credit certificate so you are not put on the high tax code, commonly called an emergency tax.

Ultimately, a P45 form is crucial for you to have since it will be a requirement for future employment and tax purposes.

How Long Can An Employee Keep A P45 Form?

You can keep your P45 for the entire tax year in which it was issued. It signifies that in case the tax year changes between leaving a job and commencing another, you will then rather have to use the starter checklist.  The starter checklist gives an employer the details they need to put a new employee on the payroll system and assign the correct tax code for tax and NIC deductions. It was previously known as a P46 form.

Further down the line, despite the fact that a P45 remains valid for a year, it is discreet to retain them for as long as you possibly can. This is because HMRC can conduct tax probes up to 20 years after a specific tax period. Thus, you are advised to maintain your complete records.

It is worth highlighting here that if you lose your P45, you cannot get a replacement. Nevertheless, you can ask your former employer to issue you a statement of earnings or use a starter checklist (previously known as P46) on reemployment to prevent emergency tax codes.

What Does A P45 Look Like?

A P45 document form consists of four parts that a former employer necessarily prepares upon the employee’s termination:

• Part 1 is submitted to HMRC by the ex-employer. The remaining three parts are given to the former employee.
• Part 1A is provided to the employee for their records.
• Parts 2 and 3 are given to the employee which they will provide their next employer upon finding a new job. Lastly, the new employer keeps Part 2 while using Part 3 to register the new employee with HMRC.

What Details Does A P45 Form Contain?

A P45 is divided into four sections and contains significant details of the employer and employee, such as:

• Employee’s details, like their full name, National Insurance (NI) number, and tax code.

• Employer’s details, including their name and PAYE reference number.

• Employee’s earnings details, including total pay and tax deducted so far for the tax year.

• Employee’s leaving date on which they officially left the job.
• The employee’s tax code will determine how much tax the employee paid upon leaving.

What is The Importance Of A P45?

Apart from containing significant details about an employee, a P45 is crucial for the following purposes:

With A P45, An Employer Ensures The Correct Taxation

The idea of overpayment or underpayment of tax is something any employee would want to steer clear of. And that is exactly where a P45 proves to be a great deal. Let’s delve into clarifying this scenario. A P45 contains information about the income an employee has received and the total tax they have paid until the date of their termination during a tax year. Likewise, it provides information regarding the employee’s existing tax code. With this tax code, an employer calculates the tax amount that will be deducted from an employee’s salary.

Now, when you embark on a new job, then you are required to provide your new employer with sections 2 and 3 of the P45. It will enable your employer to apply the correct tax code to your earnings. It should be taken into account that if your new employer does not have your P45, they might not be able to assign you the correct tax code. Consequently, this might lead you to pay more tax than applicable. In a similar manner, you may need your P45 when taking out money from a pension to ensure you are not overtaxed.

Therefore, avoid the hassle of additional administrative tasks that will come with overpayment or underpayment of tax by ensuring that you always have your P45 with you before you begin the new job.

A P45 is Needed For Claiming Benefits

A P45 is mandatory when you claim Jobseeker’s Allowance (JSA) or Universal Credit in case you do not immediately find new employment. P45 assists the Department for Work and Pensions (DWP) in calculating if your benefit entitlement is correct.

A P45 Helps While Claiming Tax Refunds

Another key factor when learning what is P45 form and its importance is that a P45 is a crucial document for employees when it comes to claiming tax refunds, particularly if they do not begin the transition into a new job immediately. To go into detail, a P45 details the individual’s earned income and the deducted tax during their employment.

Now, if there’s a gap before they begin a new job, they may be subject to overpayment of taxes. Essentially, in this instance, the P45 serves as tangible evidence for HMRC to accurately assess if there are any tax refunds owed to the employee.

Subsequently, a P45 is substantial for ensuring an efficient and streamlined refund process.

A P45 Is Crucial For Pension Withdrawals

For those employees whose retirement is approaching, a P45 helps pension providers determine the correct tax deductions that are to be made on pension payments.

 

 

Conclusion

Understanding what is P45 is vital since this document ensures employees are corectly taxed when changing jobs, claiming benefit entitlements, or retiring. Besides, employees should keep their P45 safe and provide the relevant sections to new employers or HMRC when the time comes. With a P45, individuals can manage their tax affairs smoothly and without confronting financial complications. Since a P45 is produced by the company’s payroll system, it is necessary that the company uses the latest payroll software. In this connection, payrollservices.accountants stand apart from others. We ensure our clients’ payroll processes meet regulatory requirements with our regular monitoring.

In addition, we utilise advanced payroll software to ensure accuracy and efficiency. As a result, our payroll processes are automated and streamlined, minimising errors and reducing administrative burdens. Hence, visit our payroll services today to simplify your payroll processing.

Disclaimer: Please note that the information provided in this blog is exclusively for informational purposes and should not be considered financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.