Working for an employer Changes in your tax situation
Be aware of how your tax responsibilities might change
Most adjustments in the tax you pay are made automatically. There are key moments when you need to be particularly alert, however, to make sure that HMRC has the right information and doesn’t charge you too much tax.
Your first job
When you first start work your employer should give you a form P46 to complete. This is sent to HMRC, which uses it to calculate your tax code.
Emergency tax code
Until you have one, your employer will normally use an emergency tax code based on the standard personal allowance.
If you start work any time other than at the beginning of a new tax year, the emergency code may cause you to pay too much tax or too little. This should be refunded when the correct code is applied.
Working while you are a student
If you work sporadically, you may find that you are charged income tax some weeks or months, even though over the whole tax year you earn less than your personal allowance.
To save the inconvenience of claiming tax back after the end of each tax year, there are a couple of steps you can take.
Work only during holidays
If you do paid work only during your holidays (and not term time), complete a form P38(S) and give it to your employer. This allows your employer to pay you without deducting any income tax.
Work during term time
If you work during the term time, make sure when you leave a job that your old employer gives you a form P45 and give this to your new employer as soon as you start your next job. If you don’t have a P45, ask your employer for a form P46.
Student tax calculator
To check whether you are paying the right tax, use the HMRC student tax checker. HMRC is planning to make the tax rules simpler for students from 2011-12 onwards.
Time off work
Statutory sick pay and extra sick pay your employer gives you under your terms of employment are taxable.
Your employer will deduct tax and National Insurance through PAYE in the normal way.
Payouts from private sick-pay insurance schemes that you arranged and paid for yourself are tax free.
Benefits, allowances and tax
Once your sick pay through work stops, you may be eligible for employment and support allowance (ESA) or incapacity benefit if your claim started before 27 October 2008.
These are state benefits paid direct to your bank or building society account. ESA may be taxable from the 14th week. Incapacity benefit is taxable from the 29th week.
Tax will usually be deducted either direct from each payment before you get it or through PAYE on your earnings or pension if you also have income from these sources.
Becoming a parent
Statutory maternity, paternity or adoption pay are taxable. So is any extra maternity pay your employer gives you under your terms of employment. State maternity allowance is tax-free.
Changing jobs
When you leave your job, you should get a P45 from your old employer. Give this to your new employer to ensure the correct amount of tax is deducted from your pay.
The alternative is to complete a P46, as if you were starting work for the first time.
This will generate an emergency code that may need to be changed later. You could end up overpaying tax and having to wait to have this refunded, or underpaying with a large clawback once the code is issued, so use a P45 if you can.
Taking a second job
If you have more than one job, one of these will normally be treated as your main employment. You won’t have a P45 to give to your second employer, so you’ll need to complete a P46.
Watch out for inaccuracies
Watch out – having several jobs can produce inaccuracy in the amount of tax paid and may result in tax being over or underpaid.
If you find yourself simultaneously self-employed and an employee, your personal allowance will usually be set against your PAYE earnings and you may be able to choose whether tax on your self-employment or other income is also collected through PAYE, on your earnings as an employee, or separately through the self-assessment system.
Losing your job
If you are made redundant you should get a form P45 to take to your local Jobcentre Plus.
Any unused tax-free entitlement is set against the taxable amount of any income support or Jobseeker’s Allowance you get.
Any tax you have overpaid will be refunded at the end of the tax year (or when you stop claiming benefit if sooner).
Returning to work
When you return to work after a period of unemployment, you will need to fill in the form from booklet ES40, supplied by Jobcentre Plus. Return this to the Jobcentre, which will then issue you with a new form P45.
Retiring
When you near retirement, you should inform your tax office, as your tax code needs to be changed. For more, see Tax and allowances for older people.
Chartered Institute of Taxation
Which? is grateful for assistance from the Chartered Institute of Taxation in compiling this guide. For details of the Institute and its work, see www.tax.org.uk