What is a P45?

What is a P45 for?

Income tax under PAYE is worked out cumulatively across the tax year. Each payday, the employer looks at total pay and total tax so far and deducts whatever brings the running total to the right amount. When someone changes jobs, the new employer needs those running totals or the arithmetic starts from nothing, and the P45 is how they get them.

It has several parts. Part 1 goes to HMRC, which in practice happens through the employer's real-time payroll submission when the leaver is reported. Part 1A is the employee's own copy to keep. Parts 2 and 3 go to the new employer, who keeps one and sends the other to HMRC. The employee should never be asked to hand over Part 1A.

It is generated by payroll software when an employee's final pay is processed and their leaving date entered. There is no separate form to fill in; the numbers on it are simply the year-to-date figures from the payroll at the point of leaving.

A worked example

A barista leaves a café at the end of September, having earned £11,400 since 6 April with £820 of income tax deducted over those months. The café's payroll marks her as a leaver on her last payslip, reports the leaving date to HMRC in the next submission, and issues the P45 showing £11,400 pay to date, £820 tax to date, her tax code and the date she left.

She starts at a restaurant in October and hands over Parts 2 and 3. The restaurant's payroll enters the year-to-date figures, and from her first payslip the tax is calculated as though she had been there since April: the right amount, first time.

Without the P45 the restaurant would put her on a starter checklist and an emergency code instead. She would probably pay slightly the wrong tax for a month or two until HMRC's records caught up, and any over- or under-payment would be sorted later through a code change or a refund.

What happens if there is no P45?

• —The new employer uses the starter checklist, which asks about other jobs and benefits to pick a starting tax code.
• —Tax is deducted on an emergency or non-cumulative basis until HMRC issues the correct code.
• —Any difference works itself out during the year through an amended code, or after the year end through a refund or a bill.
• —The old employer cannot issue a duplicate P45, but the figures on it can be found on the employee's final payslip or through their personal tax account.