An employer will be required to inform Her Majesty’s Revenue and Customs (HMRC) when an employee retires or leaves the organisation. Also, the employer must subtract and pay the correct National Insurance and tax due.
What an employer needs to do?
An employer should update an employee’s exit date on the payroll system and make the usual deductions while making the Full Payment Submission (FPS), except if an employee is receiving a company pension. An employer can send a FPS, to inform HMRC about the payments and deduction, through a payroll software. Also, an employer must provide an employee with a P45 form – in case the payroll software doesn’t generate a P45 form automatically then the same can be ordered as a copy from HMRC. In case an employee leaves the organisation in the present tax year and an employer didn’t inform HMRC in the month he/she left, then it must be considered in the subsequent FPS. The key points to be recorded include the following:
- Notify the date of leaving the organisation
- Add ‘0’ in the field/section – ‘Pay and tax in this period’ field
- Add the previously stated data of salary, National Insurance, income tax and additional payroll statistics in the ‘Year to date’ section
- Record the ‘Payment date’ as either the present FPS disbursement date or the previous date the wage earner was compensated
- If the ‘Payment date’ entered isn’t the present FPS payment date, add ‘H’ (amending a previous payroll report) which defines the reason for reporting late.
In case a wage earner left the organisation in tax year 2018-19, an employer must send HMRC either of the following:
- Use a payroll software to send an Earlier Year Update (EYU) for that year or Her Majesty’s Revenue and Customs’ (HMRC) basic pay-as-you-earn tool
- FPS for the preceding year highlighting accurate year to date figures, if the software has such a provision.
Additionally, if an employer adds an incorrect leaving date in the FPS, they will be required to update the correct date in the payroll records. It must be noted that the amended report should not be considered in the following FPS as this might create an identical record. In order to avoid all this, below mentioned is a check-list to ensure that an Employer Payment Summary (EPS) or Full Payment Submission (FPS) is sent on time:
- On the FPS report, record the date when the employee was paid, and not the date it was sent
- Record and report other details, such as deductions and pay, correctly
- Previously paid amount to HMRC – an employer might have paid too little or too much in case the reports were incorrect.
Payments made to an employee
An employee must keep track of an employee’s wage or salary in a payroll software, even if an employee receives less than £118 for each week. Other expenses such as company car and benefits are reported independently at the completion of a tax year. Other payments that can form part of the normal pay encompass:
- Bonus or tip (this will depend on the nature of the job and the industry in which an employee is working)
- Disbursements for the amount of time spent by an employee travelling for official purpose
- Guarantee payments, offered to an employee for the period they do not work (this is separate from paid holiday)
- Incentives or commission
- Maternity suspension disbursements, provided to an employee for her, or her child’s, health
- Medical suspension disbursements, provided to an employee who has been suspended for medical reasons
- Office holder’s payments (honoraria), offered to employees for carrying out services, for instance being an organisation’s sports-club secretary
- Passenger payments, except for the initial 5 pence for each mile
- Pay for holiday (unless an employer pays it as an early payment or uses a holiday pay structure).
Paying a Company pension
An employer must keep track of, and provide a few things if they are paying pension to an employee who is retiring:
- A distinct payroll ID must be used for pension payments – FPS must reflect that the payroll ID has been altered
- An employer should not include the leaving particulars in the FPS as the employee is still on the payroll
- An employer must use an employee’s prevailing tax code on ‘month 1’ or ‘week 1’ basis till they get a new tax code from HMRC
- Give the full twelve-monthly amount of pension
- For each pension payment, an employer must enter ‘Yes’ in the ‘Occupational pension indicator’ field
- Provide the retiring employee with a retirement declaration highlighting their employment specifics till their retirement date
- If the scheme is listed with HMRC, an employer will not be required to deduct National Insurance (NI) from the pension payments. However, they must deduct tax in the usual manner.
Paying paternity or adoption pay, statutory maternity
An employer must continue to pay paternity or adoption pay, statutory maternity pay up to the completion of an employee’s statutory leave of absence, even if an employee stops working. An employer must agree with one of the below mentioned:
- Provide an employee with a P45 when they discontinue to work, and subtract tax on the left over statutory disbursements under code 0T on a ‘month 1’ or ‘week 1’ basis (if an employee is taxes at Scottish rate, use the code S0T or C0T if an employee is taxed at the Welsh rate)
- Use the standard tax code for the statutory disbursements and give employees a P45 after the final payment has been made, recording the final payment date as an employee’s leaving date.
Scottish Income Tax
|Tax band||Taxable income||Scottish tax rate|
|Personal Allowance||To a maximum of £12,500||0%|
|Starter rate||Between £12,501 and £14,549||19%|
|Basic rate||Between £14,550 and £24,944||20%|
|Intermediate rate||Between £24,945 and £43,430||21%|
|Higher rate||Between £43,431 and £150,000||41%|
|Top rate||In excess of £150,000||46%|
Income Tax in Wales
|Tax Band||Taxable income||Tax rate|
|Personal Allowance||To a maximum of £12,500||0%|
|Basic rate||Between £12,501 and £50,000||20%|
|Higher rate||Between £50,001 and £150,000||40%|
|Additional rate||In excess of £150,000||45%|
Paying an employee after giving them a P45
In case an employee is required to pay an employee after he/she leaves the organisation (comprising of someone who has been getting a taxable redundancy payment in excess of £30,000):
- Use tax code 0T on a ‘month 1’ or ‘week 1’ basis (if an employee is taxes at Scottish rate, use the code S0T or C0T if an employee is taxed at the Welsh rate)
- Subtract National Insurance (except if it’s a termination payment) and any student loan compensations as usual– however, if an employee makes an ‘irregular’ payment such as an unexpected bonus or accrued holiday pay, consider it as a ‘once-a-week’ payment
- Report the deductions and payment in the subsequent FPS, using an employee’s unique payroll ID, and ‘date of leaving’, and update the ‘Payment after leaving’ pointer
- Provide an employee with written approval of the disbursement highlighting the deductions and gross amount
- Add the supplementary payment in the ‘Year to date’ section if the disbursement is made in the similar tax year
Once a P45 form has been provided to an employee, an employer must be careful that they don’t give the employee another P45 form.