New Employee with Month1 tax code

New Employee with Month1 tax code

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We've just started a new employee. She's on a "month 1" tax code (457LX) and has already been paid in October by her previous firm (but don't know how much). How do I calculate her tax free pay for October when I pay her? She left there on 13th October. Do we take a twelfth of 4575 and prorata for the period 14th Oct - 31st Oct?

Also, do we pro rata the NIC limits?

Thanks
Steve Smith

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By neileg
25th Oct 2006 09:15

Mmm...
Euan, I agree that your sins are minor, but I would still observe that you are assuming that you have all the information to know what the true tax position is. You don't, you're guessing.

On the P45 point, it has been many years since I did a manual payroll, and the guidance for P45 errors has changed. It used to be the case that you did what you do now, but any adjustment for tax overpaid was limited to the tax due on the first pay with the new employer. In other words, you could reduce the tax deducted to zero, but not make a net refund.

These days, my PAYE exposure is limited to reading my payslip produced by SAP Payroll, along with the other 18,000 people on our payroll.

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By stephen.smith.ramesys
24th Oct 2006 16:00

Thanks for the speedy reply
I'll check the P45 and take it from there

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Euan's picture
By Euan MacLennan
24th Oct 2006 14:33

Use code BR
Does her P45 show Month 7 or Week 28?

If it is Month 7, her previous employer was paying her monthly and will already have deducted the tax-free allowance for the whole of October. Technically, you should operate the code of 457L quoted on her P45, but that would give her the tax-free allowance twice and understate her tax, so although it is not strictly correct, I would use a PAYE code of BR for your pay to her for the rest of October. This will deduct tax at 22% which will be the right amount (assuming she is not a higher rate taxpayer). Use 457L on a Month 1 basis from November onwards.

If her P45 says Week 28, she will have been given the allowances for only 2 weeks of October. Assuming you are paying her monthly, I would follow the rules and use the P45 code of 457L on a Month 1 basis, but tell her that she will have underpaid tax slightly for 2006/07, which the Revenue may identify and amend her PAYE code for some future year (or they may not) .

NI stands alone for each employment. Calculate NIC as if her pay from you represents a full month.

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By neileg
24th Oct 2006 17:13

Euan, I disagree
An employer has no authority to use a different tax code from the one officially provided, even if the one that has been operated is manifestly wrong.

The PAYE guidance for Week1/month1 codes specifically tells you to ignore previous pay and tax details. As a result, the new employee's tax calculation should allow the full Month1 allowance for October's pay.

The fact that the employer suspects that the resulting tax calculation may be wrong is not a justification for playing around with the rules. After all, we're only guessing the reason for operating a week1/month1 code, anyway.

If an employer wants to take the initiative, contacting HMRC and following their instructions (which may still give the wrong answer!) is all the law permits you to do.

NICs are easier. If the normal pay frequency is monthly, you use the monthly tables even if the pay relates to a fraction of a month.

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Euan's picture
By Euan MacLennan
24th Oct 2006 18:40

Neil, you are absolutely correct...
...but I would still bend the rules to get the amount of tax right. If my sin ever comes to light during a PAYE inspection, I suspect the Revenue officer would agree with my method but if not, I will accept having my knuckles rapped. Oh dear!

I must admit that I am invariably guilty of another sin with regard to P45s with cumulative PAYE codes. May I ask if you follow the PAYE guidance which says "Do not enter the 'Total tax to date' figure from the P45 on the P11. Instead, using the week or month number shown on the P45, the PAYE code and the figure of 'Total pay to date', work it out for yourself and enter your figures on the P11."? Why on earth should one go through the effort of checking the previous employer's maths? The whole point of a cumulative PAYE code is that any mistakes will be automatically corrected on the next payroll you run.

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