As an employer, one of your many responsibilities is to ensure that your employees are paying the right amount of tax through PAYE (pay as you earn). Payroll isn’t one of the most exciting tasks for you to look forward to, but it’s extremely important for ensuring that everyone is receiving the correct wage and paying the right contributions.
Usually, your employees will be assigned a clear tax code by HMRC, making this a simple and straightforward process. However, under certain circumstances, an employee may be placed on emergency tax, which essentially means they have not yet been assigned a tax code. For more info on this general topic, check out this guide to tax codes, where you can download a comprehensive guide to payroll as well as other relevant information that will come in useful.
H2: What Are Tax Codes?
Before we discuss emergency tax, you need to know about tax codes. Tax codes are combinations of numbers and letters that indicate how much money should be deducted from an employee’s wage to pay income tax. These codes are calculated by HMRC and sent to you as the employer, which means you can ensure that your employees are paying the right amount of tax when you’re sorting out payroll.
Everyone who is paid through PAYE must have a tax code. As an employer, you’ll gain information on the correct tax code for your employee by looking at their P45 from their previous employer. Or, you can obtain their tax code by looking at the Notice of Coding (P6 form) sent by HMRC. If an employee’s tax code changes, HMRC will send you a P9X form informing you of this change before the start of a new tax year.
H2: What Is Emergency Tax?
If HMRC doesn’t have enough information about someone to assign them a tax code yet, they’ll be put on emergency tax. This is a temporary tax status that’s applied to employees whilst HMRC figures out the correct tax code.
So, when is someone usually placed on emergency tax? An employee could be on emergency tax because they haven’t got their P45 from their previous employer, this is their first job, they were self-employed for a period of time, they have more than one job, or they’ve been receiving state benefits. In all of these situations, the employee doesn’t have sufficient financial information to help HMRC calculate the correct tax code yet.
H2: What Are the Different Emergency Tax Codes?
There isn’t just one emergency tax code. Your employee could be on one of a few different emergency tax codes based on their personal circumstances. Here’s a quick explanation of each emergency tax code:
H3: 1257 Emergency Tax Code
As you can see by the number ‘1257’, this emergency tax code takes the tax-free personal allowance (currently £12,570) into account, so the employee won’t pay any tax on the first £12,570 they earn in their salary. This is similar to how tax codes work for most employees, but the key difference is that this tax code doesn’t factor in any time spent when the employee wasn’t working. During this time, the employee could have earned a backlog of tax-free allowance, but this wouldn’t be taken into account with this tax code. Ultimately, this could mean that the worker ends up paying more tax than they need to.
H3: BR Emergency Tax Code
This tax code is the most common out of all emergency tax codes. The ‘BR’ stands for basic rate, which signals that the employee will pay the basic rate of tax on their income (20%). However, the difference between this tax code and the 1257 emergency tax code is that the BR emergency tax code does not factor in the £12,570 tax-free allowance, meaning that the worker’s entire income will be taxed at the basic rate of 20%. As a result, this employee would pay more tax on this tax code.
H3: OT Emergency Tax Code
Finally, an employee could be placed on the OT emergency tax code. This tax code is similar to the one above because the £12,570 tax-free allowance is disregarded, but it applies to those who earn over the basic tax rate band, i.e., those with a salary of over £50,270. Therefore, an employee on this tax code will pay either the higher rate of tax (40%) or the additional rate of tax (45%) on their entire salary.
H2: How Can You Change a Tax Code?
As you can see, employees on an emergency tax code will often end up paying more tax than necessary. Once they’re moved onto a regular tax code and they start paying the correct amount of tax, they can apply to HMRC for a tax rebate. This will help them claim back the extra money they paid during the period when they were on an emergency tax code.
For your employee to change their tax code and stop paying emergency tax, they’ll need to provide more information to allow HMRC to calculate the right tax code. For example, they should ensure that you receive their P45 from their previous employer so that you can notify HMRC and input this information into your payroll system.
If your employee doesn’t know why they’re on an emergency tax code or they think there’s been a mistake, you should double-check that your payroll information is correct as it’s your responsibility to check your employees’ tax codes. You should encourage this employee to contact HMRC if they still have concerns.
H2: Conclusion: Managing Your Payroll Systems
Keeping track of your payroll systems can be a complicated task. In particular, checking tax codes and contributions for every employee can become very time-consuming, especially if your business is expanding and hiring new workers.
To manage your payroll systems effectively, it’s a good idea to use a high-quality payroll service provider. This will reduce payroll errors, help you avoid tax penalties, and allow you to free up time to focus on other areas of your business.
