Ensuring that new employees are registered to pay tax forms an important part of an employer’s role in fulfilling their obligations to HMRC. This includes how and when to use emergency tax codes for new starters.
In this guide for employers, we explain the emergency tax rules, how they work, how to use them and the different codes that can be used.
What is an emergency tax code?
An emergency tax code is essentially a temporary code that an employer is required to submit into their payroll software for a new employee, where that employee has not been able to produce a recent P45. This might be because the employee has not been in paid employment for some time, either because they were previously self-employed or they have been out of work altogether, or because their previous employer failed to give them a P45.
By using an emergency tax code, this will allow tax to be deducted directly from source, from the employee’s gross salary, until HRMC sends the employer the correct code. The temporary code will allow a calculation to be made as to how much tax should be deducted from the employee’s pay, at least for the time being. HMRC will usually update an employee’s tax code once the employee or their employer gives them the correct details.
However, if a change in circumstances means the employee has not paid the right amount of tax, they may stay on the emergency tax code until any outstanding tax has been paid.
When are emergency tax codes used?
An emergency tax code will need to be used by an employer where a new employee has not been able to provide a P45 or their P45 is no longer valid.
When an employer takes on a new starter, there are various steps that will need to be taken, including registering them for PAYE, where applicable, and setting them up with the correct tax code for the purposes of deducting tax. This means that, having checked that they need to pay their new starter through PAYE — where that individual must be working in an employed role and not on a self-employed basis, as well as earning £123 or more a week — the employer will need to obtain certain information from the employee to work out which tax code and starter declaration to use in their payroll software for them.
The information needed for payroll will include the employee’s full name and address, their date of birth and sex, their National Insurance number, their employment start date and the leaving date from their last job, the employee’s total pay and tax paid to date for the current tax year, their student loan deduction status and their existing tax code.
The employer can usually get most of this information from any recent P45 that the employee is able to give them from their previous employer. A P45 provides a record of how much an employee has earned in their last job and what taxes they have already paid in the current tax year. The information from the P45 means that the right details can be passed to the new employer to ensure that tax continues to be deducted at the correct rate.
However, if the new employee does not have their P45 or has an old P45, for example, where they have not been in paid employment since before 6 April 2021 or have been self-employed, their P45 will no longer be valid. This is because a P45 is only valid for the tax year for which it was provided by the last employer. In these circumstances, the employee must be asked to complete a HMRC starter checklist, to provide the new employer with enough information about the current tax year to be able to work out a temporary code.
The information obtained from the HMRC starter checklist, together with any emergency tax code and starter declaration code calculated by the employer, must then be reported to HMRC using a Full Payment Submission (FPS) on or before the employee’s first payday.
How to use an emergency tax code
Where an employee is not able to produce a recent P45, they must be asked to complete the HMRC starter checklist that can be found at GOV.UK. This can either be completed online by the employee and printed off, or downloaded and completed manually. The form must also be signed and dated by them. The checklist asks the employee for their personal details and, importantly, to select the most appropriate ‘employee starter declaration’ statement.
There are three statements for the employee to choose from, either indicating when the employee last worked and whether or not they have been in receipt of benefits since then, or whether they have been in receipt of any form of pension, either state, works or private. It is important that the employee chooses the correct statement, otherwise they could end up paying too little or too much tax because the employer then goes on to wrongly calculate their emergency tax code on the basis of an inaccurate statement.
The three statements that an employee can choose from on the checklist are as follows:
- Statement A: “This is my first job since 6 April and since then I’ve not received payments from any of the following — Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit.” This should be used, for example, where the employee is starting their first ever paid job having left school or college.
- Statement B: “Since 6 April I’ve had another job but I don’t have a P45 and/or since then I’ve received payments from any of the following — Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit.” This should be used, for example, where the employee has not been given a P45 by their last employer.
- Statement C: “I have another job and/or I’m in receipt of a State, Works or Private Pension.” This should be used where the employee is in receipt of any type of pension.
The employee should be asked to give the completed checklist to the employer, which must then be forwarded to the employer’s payroll department or payroll provider. There is a useful online tool at GOV.UK that can be used by the employer to calculate the emergency tax code to use in their payroll software based on the employee’s starter declaration. This will also provide guidance on what other steps may need to be taken before the employer pays their new employee for the first time, for example, ways to obtain the employee’s National Insurance number where the employee has been unable to provide this.
The information obtained from the new starter checklist must be retained by the employer as part of their payroll records for the current year and the following three tax years, where any failure to do so could lead to the imposition of sizeable financial penalties by HMRC.
What are the different emergency tax codes?
An employee’s tax code is made up of several numbers and a letter, where 1257L is the most common tax code, used for those who have just one job and no untaxed income, unpaid tax or taxable benefits, for example, a company car. The numbers in the tax code indicate how much tax-free income an individual gets in that tax year, multiplying the number by 10 to get the total amount of income they can earn before being taxed. The letters in a tax code refer to the employee’s situation and how it affects their personal allowance, where L means that the employee is entitled to the standard tax-free allowance.
If an employee is on an emergency tax code, their payslip will usually show either 1257L W1, 1257L M1 or 1257L X. These mean that the employee will pay tax on all of their income above the basic personal allowance. The standard personal allowance for the 2022/23 year is £12,570, which is the amount of income that an employee does not have to pay tax on.
The codes W1 and M1 refer to either week 1 or month 1, where an employee’s tax is calculated only on what they are paid in the current pay period, on a non-cumulative basis, not their overall year-to-date earnings. The letter X simply indicates an unknown tax code and might be used by HMRC where the employee’s pay period is non-standard.
Other tax codes that may be used when a new employee starts work — either because these represent the existing code on any up-to-date P45, or where the online tax code tool advises the employer to use a particular code based on the information given, include:
Emergency tax code
|1257L W1 or 1257L M1 or 1257L X||Tax is payable on all of the income above the basic personal allowance (£12,570 for 2022/2023).|
|OT||Tax is deducted from all income as no personal allowance is applied because the employee has started a new job and is unable to produce a recent P45 or enough details to give them a tax code, or their personal allowance has been used up.|
|BR||All of the employee’s income from their job is being taxed at the basic rate, with no personal allowance, usually where the employee has additional sources of income, such as a second job or a pension that has used up their tax-free allowance.|
|DO||All of the employee’s income from this job is taxed at the higher rate, again usually used if the employee has got more than one job or pension.|
|D1||All of the employee’s income from this job is taxed at the additional rate, again usually used if the employee has got more than one job or pension.|
|M||The employee’s income is taxed at basic, higher and additional rates, depending on the amount of taxable income, having received a transfer of their spouse or civil partner’s personal allowance under the marriage allowance rules.|
|N||The employee’s income is taxed at basic, higher and additional rates, depending on the amount of taxable income, having transferred some of their personal allowance to their spouse or civil partner under the marriage allowance rules.|
When using the online tax code tool, the employer may be advised to use emergency tax code 1257L, or one of these other codes if the employee has been able to produce a recent P45 and they have a code including any of these letters. If a new employee has more than one P45, the employer should use the one with the latest date. If both P45’s have the same leaving date, the employer should use the one with the highest tax-free allowance.
Best practice for employers
When registering an employee for PAYE, it is important that an employer obtains up-to-date information from the employee to allow them to calculate the correct tax code to put the new starter on, even if this is only a temporary code for the time being. As such, the employer must ensure that the employee is asked to produce a P45 where at all possible.
In circumstances where the employee is unable to produce a recent P45, the following best practice advice should be followed by the employer:
- Provide the employee with guidance as to how to select the correct employee starter declaration statement when completing an HMRC starter checklist
- Use the information from the HMRC starter checklist to register the employee for PAYE and to complete the employee’s first FPS, but do not send the checklist itself to HMRC
- Retain the completed and signed employee starter checklist as part of payroll records
- Update the payroll records if the employee later produces a P45 after the employer has registered them with HMRC, so that HMRC can update the employee’s tax code
- Make the appropriate payroll adjustments once HMRC sends the correct tax code.
In addition to any updates from HMRC throughout the course of the tax year, they will also inform the employer between January and March, prior to the start of the new tax year in April, about any new tax codes to use for employees. If an employee’s tax code is not changing, HMRC will not contact the employer to confirm this, where the employer should simply carry forward the employee’s tax code to the new tax year. If an employee’s tax code ends with ‘M1’ or ‘W1’, this part of the code should not be carried forward.
Emergency tax code FAQs
What is a emergency tax?
Emergency tax is where estimated tax is deducted at source from an employee’s pay packet, based on an emergency tax code used by a new employer, usually in circumstances where the employee has been unable to produce a recent P45.
Do you get emergency tax back?
If an emergency tax code used by a new employer means that an employee has paid too much tax, they should receive a rebate from HMRC, although there may be tax to pay if the employee has not paid enough.
How much is UK emergency tax?
How much UK emergency tax is deducted from an employee’s pay will depend on the emergency tax code used, for example, tax code 1257L means the employee will pay tax on all of their income above the basic personal allowance.
How much tax do you pay on emergency tax code?
On an emergency tax code, an employee may end up paying too much or too little tax, where they may have an outstanding bill or be entitled to a rebate once the correct tax code has been provided by HMRC.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.