Comparing Tools - Accuracy Wins..

I’m not a competitive person and don’t do ‘apple versus pear’ comparisons.? If one person’s tool is better than mine, I don’t try and emulate their one.? May the best tool win if it’s accurate.?

Every year I write a document entitled 'Which tax code to use'.? This covers the situations where:

• An employee starts with an ‘in date’ P45 or
• An employee starts without an ‘in date’ P45 or does not have a P45 at all

An ‘in date’ P45 refers to a P45 with a leave date in the current tax year or the tax year immediately preceding it – i.e., from tax years 2021/22 or 2020/21.? These can be used by the new employer.? But the pay and tax details on the P45 must be checked as correct and may or may not be used:

• Pay and tax details should NOT be used for a P45 with a leave date in 2020/21
• Pay and tax details SHOULD be used for a P45 with a leave date in 2021/22

If the P45 has a leave date before 06 April 2020, it is referred to as an ‘old’ P45 and cannot be used by the new employer.

Then, there is the situation of which tax code to use.?

HMRC’s PAYE Manual stresses the importance of 24 May, relevant for P45s with a leave date in the previous tax year (2020/21) and a new employment start date between 06 April and 24 May.? For the current tax year, we are talking about 24 May 2021.?

The importance of this date is that the employer takes the P45, ignores the pay and tax information but increments the tax code in accordance with the P9X instructions.? For 2021/22, this said:

So, as a simple example:

• An employee has a P45 with a leave date within the 2020/21 tax year.?They start on 01 May 2021
• The P45 tax code is 1250L
• The employer is in receipt of an in-date P45 so it can be used.? However, the tax code must be incremented as per the P9X instructions
• 1250L becomes 1257L

Reading my tool, the employer would be instructed to increment the tax code by 7 points, declaring starter declaration B:

On ‘Work out your new employee's tax code’, the details about the P45 and employment start date are entered:

The following instruction is received:

The Personal Allowance did not increase at the start of the 2020/21 tax year.? It DID increase at the start of the 2021/22 tax year.?

Possibly, HMRC’s guidance tool has not taken this fact into account (nor has it mentioned the other increments that will apply if the code is not L, i.e., M or N).

Having received queries from clients and colleagues, I queried why our two tools were producing different results.? I was sure of the results given by my tool, though I understand that many employers will trust information, advice and guidance given by HMRC.

On 17 August 2021, I received the following response:

There may be many employers who have used HMRC’s tool to work out which tax code to use for a new employee at the start of the year.? Where the P45 has a leave date in 2020/21 and the start date is up to an including 24 May 2021, the employee may have been put onto the incorrect tax code. – i.e., 1250L instead of 1257L.

HMRC should have corrected this by looking at the first Full Payment Submission and issuing form P6 to change the tax code.?

The questions to ask is ‘did that happen?’.

There are three things that stand out for me:

1. If you used HMRC’s tool, consider reviewing the tax codes of employees starting on or before 24 May 2021 with a P45 from 2020/21
2. HMRC provides guidance.? It is their interpretation of the situation – but that interpretation may not always be the right one.? So,
3. Compare your tools.? A good one is one that works and gives the right results