Right First Time

When taking on a new employee it is important to operate PAYE correctly; the last thing you want to do is upset a new employee by taking too much tax from their first pay cheque!

If the employee has a P45 from the old employer, all the details needed - their pay and tax deductions so far this tax year as well as their tax code and NI number - are given and things are simple.

However, some employees are unable to provide a P45 and they have to complete a P46. This form is used to determine the tax code to be operated.

The employee has to tick the box which describes their circumstances. This is used to work out the tax code to be operated.

1. A tick here will entitle the employee to the full personal allowance of £5,035 and a tax code of 503L. This means that they won’t pay tax on the first £419 of pay each month (or £97 a week) and will be entitled to extra tax free pay of £419 for each month not worked so far this tax year. So someone starting work in October 2006 would not have to pay tax until their cumulative pay reached £2,514 (6 x £419).
   
   
2. A tick here means that the employee is taxed on each month’s pay in isolation. Each month they get the first £419 of pay tax free.
   
   
3. A tick here means that tax will be paid on all pay at the basic rate (BR) of 22%.
   
   
4. A new box has been added to the P46 this year so ex students can advise their employer that they need to repay their student loans by payroll deduction. If this box is ticked then employers should start making the necessary deduction of 9% of their pay above a monthly threshold of £1,250.

Incidentally if you have an old stock of these forms make sure you throw them out and order some new ones.