Employee starting or leaving
Employees coming and going is a very natural part of a company life cycle and as businesses expand it is likely that their staff turnover will correlate with the increase in size. Ideally most employers like to keep their staff turnover as low as possible, as not only is replacing a worker a costly aspect of running a business, but it can also have a detrimental effect on staff morale.
Employee retention is now a focus for most companies and it is becoming increasingly common for companies to offer generous benefit packages including flexible working hours, performance reviews and incentives and bonus schemes in a bid to keep staff performance at a high and employee turnover low.
Nevertheless, even with the best benefits package in the world, it is unlikely that a company will be able to retain the same group of workers from start to finish. Inevitably members of staff will leave to pursue other opportunities, some will retire and some will opt to quit because the job role simply isn’t for them. Whatever the reason, employee’s who leave will need to be replaced, and a growing company will need to continue to create new job roles in order to flourish.
As an employer you will need to familiarize yourself with the in’s and out’s of taking on a new employee, an employee leaving your company and an employee who retires when working for your company, so that you can feel assured the correct procedures have been followed.
New employees – the first steps
If your company is expanding and has decided to take on a new employee/s there are some essential initial checks that will need to be performed.
Firstly you will need to check that the potential employee is legally able to work for you before you proceed with any of the below steps. Providing that you have established that the employee is legally entitled to work for you, you will then need to follow certain protocols including the following:
- If this is the businesses first employee, you will need to register the company as an employer, after which you will then need to set up a Pay As You Earn system. A more detailed explanation of this step can be found below.
- If this is not the first company employee then you will need to fill out the applicable PAYE paperwork.
Registering as an employer
Employee’s who meet certain earning thresholds or who have another job or pension will need to be paid using the PAYE system. As mentioned briefly above, if your new employee is going to be your first employee then you will need to register your company as an employer so that you can operate the this system.
It is the responsibility of the employer to ensure that they provide anyone new to the company with the correct employment status, meaning they must decide whether the new staff member is an employee or self-employed.
If employers fail to get this right, they may end up paying extra National Insurance Contributions, Tax and interest as well as being at risk of being liable to pay a penalty for their mistake.
The employment status of an individual is usually dependent upon the contract terms that have been set out between both parties. Generally speaking a contract of service usually means they are an employee and a contract of services usually means they are self-employed.
If you are uncertain about employment status then you can visit the HMRC guide ‘Employment status: employed or self-employed?’ to help you decide.
Setting up payroll for a new employees
Before you begin making payments to a new employee you will need to ensure that you are prepared to deduct the correct PAYE and National Insurance Contribution (NICs) amounts before you issue them with any pay.
In order to establish the necessary PAYE and NIC deductions you will need to perform a series of calculations. An electronic payroll system is fast becoming the most popular and accurate way of making calculations such as these but you can do them manually if you wish. Either way you will need to know the tax code of the employee in question so that you can work out how much PAYE to deduct, and you will also require their National Insurance category letter which will enable you to deduct the correct amount of NICs.
If your new employee has come directly from another job they may provide you with a P45. A P45 is a form given by an employer to an employee when they stop working for them. It is a record of the employee’s pay and the tax that has been deducted so far in that tax year and will also provide the following details:
- tax code
- National Insurance Number
- leaving date
- earnings in the tax year
- how much tax was deducted from earnings.
There are some instances in which a new starter will not be able to provide you with a P45, for example if it their first job, if they are a student working during the holidays, if it has been mislaid, or if their previous employer has failed to provide them with one.
If this is the case then you will need to obtain this information by requesting that your new employee fills out a P46 form. This form is for your reference and does not need to be sent off to HMRC.
Employers will need notify HMRC any time a new employee begins working for their company and will be required to provide them with the code number they are operating before the employee’s first payday. The incidences in which employers are exempt from following the above procedure is either when the employee is a student who is working for your company only during their holidays, or if the employee intends to work for you for less than a week (with no intention of returning within the same year).
Troubleshooting – common new starter issues
There is a great deal to consider when taking on a new employee and unfortunately there are many scenarios which may arise, making the procedure slightly more complicated than you had anticipated or prepared for. Below are some common problems which may crop up when taking on a new member of staff, and various ways in which you could solve them:
Scenario one: ‘My employee has given me their P45 late’.
There are a number of scenarios that employers may face if a new starter produces their P45 late.
Recommended action: If an employee produces their P45 after the employer has completed a P46 but before the employee’s first payday, the required action will depend on whether or not the employer has been sent a new tax code by HMRC.
If the employer has been sent a new tax code since their new starter began, they should continue to use that tax code to make the appropriate deductions.
However, if their P45 shows a student loan indicator then employers will need to begin making the necessary student loan repayment deductions from employee’s wages unless told otherwise by HMRC. In incidences such as these employers should destroy Part 3 of the P45 as the new tax code received replaced this.
If a new tax code has not been received since the employee began then employers should:
- If there is a student loan indicator on the P45 employers should deduct payments unless they receive a stop notification from HMRC.
- Use the tax code given in Part 3 of the P45 if it is for the current tax year.
- If Part 3 includes details of previous pay and tax and you have checked these details are correct, add them to pay and tax details since the employee started within your company.
- If you find that less tax is due to date than the total that has been deducted so far, repay the difference to the employee.
If an employee produces a P45 after their first payday and the employer has already received a new tax code then they should destroy the P45.
If a new tax code has not yet been received then employees need to either use payroll software to check the P45 figures manually before deciding upon the appropriate tax code. Most payroll software will update the system with your employee’s details but you will need to check this.
For more information please visit the HMRC guide: Employee doesn't have a form P45.
Scenario two: ‘My employee does not have/know their National Insurance number’.
A National Insurance number is an individual’s unique account number used by the HMRC to keep track of the NIC payments they make throughout their life. This number insures that the contributions made are recorded, thus protecting the right to state benefits for anyone who pays NICs. For this reason, it is essential that HMRC know the National Insurance number of any new employee who starts within your company.
There are certain scenarios in which a new employee may start with your company without a National Insurance number. In instances such as these you may continue paying your employee providing that you keep a record of their name, address, date of birth and gender, and that you take the appropriate action to obtain their National Insurance number as soon as possible.
Recommended action: If a new starter has never had a National Insurance number HMRC recommend that they get in touch with their local Jobcentre Plus office who will arrange what is known as an ‘Evidence or Identity’ interview for them or will send them a postal application.
For further information about applying for a National Insurance number please visit the HM Revenue and Customs website.
- If a new starter has previously had a National Insurance number but does not know what it is, notify HMRC with your new starter information and they will trace the number and will then let you know what it is.
- If a new starter has a P45 and no National Insurance number and the P45 does not show their National Insurance number then ask them to look on any other previous documentation such as a payslip or a P60 as it may be featured on one of these.
- If your employee is unable to find their National Insurance number then you can use the National Insurance number tracing service by completing a CA6855 ‘Employee’s national insurance number trace’.
Scenario three: ‘HMRC have notified me I need to change my employee’s tax code’.
A P6 form is HMRC’s way of notifying employers that they need to change an employee’s tax code because their personal circumstances have changed.
Recommended action: If you receive a P6 notification it is your responsibility as an employer to implement the given code from the next payday onwards, unless advised otherwise by HMRC.
Employers should be aware that if they have registered for the HMRC ‘Online for employers service’, they will probably receive new tax code notifications by email and not through the post.
Scenario four: ‘My employee has been previously claiming Jobseeker’s Allowance’.
Recommended action: If a new starter was previously unemployed and has been claiming benefits they will need to put a stop to them by visiting Jobcentre Plus and informing them that they need to stop the claim.
Scenario five: ‘My employee is a student/temp’
Recommended action: When it comes to deducting Income Tax and National Insurance payments for students or temporary workers the rules work slightly differently.
Very generally speaking if an employer takes on a student during any school holiday period they will not have to make any PAYE tax deductions. However if they work outside of school holidays on a regular basis then PAYE deductions should be carried out as normal. Employers should note that in most cases National Contributions would need to be deducted either way.
For further information about taking on new employees in special situations, please visit the HM Revenue and Customs website, which covers employing temporary or agency workers, employees with more than one job, freelancers, self-employed and employee’s with a student loan.
When an employee leaves a company the employer is obligated to carry out certain procedures.
If employers have kept a P11 or another equivalent payroll record for the employee, all they will need to do is fill out the leaving date:
- If the employer is using the free P11 calculator offered by HMRC then they will be able to update the leaving date by entering it into the employee database.
- If the employer uses a paper P11 they should enter the leaving date in the appropriate box.
- If the employer used payroll software they should ask their software provider about how to update the system with the employee’s leaving date.
Note: Most employers are required to fill out a P11 online.
Completing the employee's P45
Any employee for whom an employer has kept a P11 will require a P45 when they leave. Part 1 of the P45 must be sent away to HMRC and parts 1a, 2 and 3 must be printed and given to the employee so they can take it with them to their next place of employment.
When completing an employee’s P45 employers need to ensure that they provide the following information:
- employer PAYE reference
- full name, address, gender, date of birth, payroll number and National Insurance number of the employee who is leaving
- tax code
- leaving date
- an indication of whether student loan deductions were made
- details of earnings
- details of tax deductions.
The Employment Equality (Repeal of Retirement Age Provisions) Regulations 2011 now mean that the default retirement age has been fully abolished after being phased out from April 2011 and employee’s can generally retire when they choose to do so.
If employers do wish to enforce compulsory retirement from a certain age, they will need to provide objective justification as to why, and supporting evidence will need to be given at a tribunal.
Employer’s who do operate a compulsory retirement age should ensure that they carry out the dismissal procedure fairly by informing the employee well in advance of when they are intending to retire them, by arranging to discuss their retirement with them, by considering a request by the employee to work beyond the compulsory retirement age and by making it clear to them that they can appeal.
Paying a pension
If you will not be paying a pension to an employee who is leaving then all you will need to do is ensure that their P45 has been filled out correctly.
Any company that has five or more employees is legally obliged to offer a pension plan. A good solid pension scheme is now considered by many to be a huge incentive to work for a company, so many now offer a generous pension plan as part of a benefits package.
If you will be paying the employee an occupational pension then you will not need to complete a P45 as HMRC will continue to treat them as though they are still on your payroll.
However you will need to get in touch with HMRC within a maximum of 14 days of an employee’s retirement to provide them with the following information about the employee (in most cases employers will be required to submit this information online):
- retirement date
- name, address and National Insurance number
- total pay from you in the current tax year
- tax deductions for the current tax year
- weekly or monthly pension amount.
Employers must also provide employees with a hard copy of the above information.
For further information about the protocols that must be followed when an employee leaves or retires, please visit HM Revenue and Customs: When an employee leaves or retires.
How could an accountant help?
If you are new to the world of employee’s starting or leaving, or if you have a growing business but you are unsure of the correct protocols when it comes to taking on new members of staff then you may benefit from contracting an accountant who could take over this responsibility.
The above procedures would usually be covered by an accountant offering payroll services so it may be worth considering whether it would be more cost effective to contract an accountant to simply look after this one area of payroll, or if it would make business sense to outsource your entire payroll department.
Either way, taking on an accountant to look after this area will mean that valuable members of staff, who previously dedicated a proportion of their time to payroll, will now be able to focus on other areas of the business.
Accountants also provide peace of mind to employer’s, who can now feel rest assured that any accounts which are filed and submitted will be clear and correct.
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