Understanding the Workings of P45 Form in Simplest Terms

While operating your accounting practice, you must have come across various forms created by the HMRC for compliance and tracking purposes, making life easy for you and your clients. These forms are P11D, P9D, P11D(B), P45, and P46 (car), to name a few that have become an integral part of the payroll management process and having a deep understanding of its working will help you in providing the best services to your clients. In this blog, we will focus on the importance of the P45 form and why understanding its working will help you streamline the lives of your clients and employees.

What is a P45?

If understanding the workings of the P11D form is important so that you do not miss out on any benefits provided by your clients to their employees, then understanding the P45 form is also important. Also known as Details of Employee Leaving Work, it is given by an employer to an employee upon the termination of employment in the UK, and like other forms, it is a part of the PAYE system.

The P45 form records the amount of tax and insurance paid by the employee from the start of the current tax year until the termination of their job. The new employer will also ask for this form when the individual is about to start a new job.

The P45 form contains multiple important information which are:

• Tax code
• Gross pay
• The amount of tax you have paid for the year
• Employer details

This document is given to the employee upon termination of employment and will be submitted to the new employer. We have to mention here that it is the employer’s duty to give P45 to the employee before the employee asks for it. If the form is not provided, then the employee has the right to demand it, and it must be sent to the employee’s home address or to the employer’s address where the employee is now working.

This task used to be handled by your client’s payroll teams, but due to increased regulation complexity, the responsibility of handling multiple HMRC forms, and other payroll activities, enough time could not be devoted to it. For these reasons, employers are increasingly preferring to hand over this important task to professional accounting practices like yours.

However, we understand your frustration with dealing with multiple forms of P45 and the increasing complexities of regulations. To top it all, you also have to perform other important accounting responsibilities for your clients. Hence, to reduce your burden, you can explore the option of using the outsourced payroll services of a professional accounting outsourcing service provider.

Why is a P45 so important?

The importance of P45 can be gauged from the fact that without it, the new employer will be unable to assign the correct tax code to the employee, which means the employee could end up paying more tax. Although it can be reclaimed by contacting the HMRC, it will be an additional headache that can be easily avoided.

That’s not all. P45 offers multiple other functions that are not directly related to termination and starting a new job by an employee. For instance, employees will need the P45 form to fill out a tax return. It is also used by an employee to claim benefits and tax refunds, especially when out of the job. In the future, an employee can use P45 to avoid overcharging on tax while withdrawing a pension.

Validity Period of P45

A P45 form is valid only for the tax year it is provided, but that does not mean it is worthless after that. Keep a record of the P45, as it can be helpful if HMRC initiates a tax investigation.

How the P45 Form Works

The P45 contains essential information, such as the amount of income received and total tax paid by your client’s employee until the termination date during the tax year. It includes the employee’s tax code, which helps employers calculate the correct tax deductions from salary. Having the correct tax code and other data is important so that the employee does not overpay or underpay tax. Also, this form will help the employee get a tax rebate.

Your accounting practice or client prepares the four-part P45 document upon an employee’s termination. The employer will submit Part 1 to HMRC and give the rest to the ex-employee. That employee will keep Part 1A and give Parts 2 and 3 to their new employer upon joining. Then, the employer will keep Part 2 and submit Part 3 to HMRC to register the new employee.

How to Get P45

The P45 form is provided by the employer or the accounting practice on behalf of their client’s employer; there may be times when your client will not give the P45 form due to a lack of awareness. Hence, we have listed down certain circumstances under which an employee must get the P45 form, which is as follows:

• A P45 must be given to an employee when they join a new company, retire, or are terminated.
• Remember, a P45 is not optional; it’s a legal document employees have the right to receive when leaving a job.
• If the employee loses the P45, they can request a new one from the employer, which must be provided.

P45 forms are complex and time-consuming, leading many employers to outsource them to accounting practices like yours. Your practice may handle P45 and payroll services well, but managing complex clients can still be overwhelming. To prevent this, consider using outsourced payroll services, providing added benefits to your clients.

Conclusion

The blog’s main objective is to explain the workings, importance, and use of P45 in the simplest possible terms. This blog helps your accounting practice understand and handle P45 forms for clients professionally and efficiently. With the right resources, you can efficiently manage P45 forms for even the most complex clients. If you need help managing P45s more efficiently, Corient’s outsourced payroll services are here to support you. We are a UK-based accounting outsourcing provider with extensive experience in payroll management, including P45 handling. For more information or to discuss your specific needs, reach out via our website contact form, and our team will connect with you. We are excited to partner with you in your long-term success.