Read our quick guide to payroll for new employees covering tax codes, the new starter checklist and student loans.

Payroll – how to deal with new starters

From a payroll perspective, there are various tasks that an employer has to perform when they take on a new starter.

For 2019/20 an employer needs to operate PAYE where the employee earns more than £118 per week (the lower earnings limit for National Insurance purposes). However, if any employees earn more than £118 per week, the employer must comply with RTI and report all payments to employees to HMRC (even those below £118 per week).

Work out what tax code to use

The tax code is fundamental to the operation of PAYE and it is important that the correct tax code is used. To ensure that a new employee is taxed correctly, the employer will need to know the correct tax code to use.

If the employee has a P45 and left their last job in the current tax year, the employer can simply use the code shown on the P45. If the employee left their last job in the 2018/19 tax year, the code on the P45 can be updated by adding 65 to codes ending in L, 59 for codes ending in N and 71 for codes ending in M.

If the employee does not have a P45, the employer will need to ask the employee to complete a new starter checklist.

New starter checklist

The new starter checklist enables the employer to gather information on the new employee. Even if the employee has a P45, it is still useful for the new starter to complete the checklist as it contains information which cannot be gleaned from the P45 (such as the type of loan where the new starter has a student loan which has not been repaid).

As far as establishing which tax code to use, the employee will need to select one of three statements:

  • A: ‘This is my first job since 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, State or Occupational Pension’.
  • B: ‘This is now my only job but since 6 April I have has another job or received taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit. I do not receive a State or Occupational Pension.
  • C: ‘As well as my new job, I have another job or receive a State or Occupational Pension’.

The following table indicates what code should be used for 2019/20 depending on what statement the employee has ticked.

Statement ticked Tax code to use
A 1250L on a cumulative basis
B 1250L on a Week 1/Month 1 basis
C BR

Does the employee have a student loan?

The employer will also need to establish whether the employee is making student loan repayments. If the employee has a P45 and is making loan repayments, the student loan box will be ticked. However, the P45 will not provide details of the type of loan. Student loan information can be provided on the new starter checklist, enabling the employer to ascertain whether the employee has a student loan, and if so what type, and also whether the employee has a post-graduate loan.

Tell HMRC about the new employee

The employer will need to add the new employee to the payroll and also tell HMRC that the employee is now working for the employer. This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid.

Partner note: The Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 67B and Sch. A1, para. 35—44.

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You might have escaped student loans, but your employees probably haven’t.

Student loan deductions

Employers fulfil many collection roles for HMRC, one of which is the collection of student loan repayments.

There are now three types of student loans for which employers may be responsible for deducting loan repayments from an employee’s pay. These are:

  • Plan 1 Student Loans;
  • Plan 2 Student Loans; and
  • Post-graduate Loans (PGLs).

Repayment thresholds

Employees must make repayments in respect of a student loan when their income exceeds the threshold for their particular loan type. Each loan has its own repayment threshold. The thresholds are as follows:

  Annual Monthly Weekly
Plan 1 Student Loan £18,935 £1,577.91 £364.13
Plan 2 Student Loan £25,725 £2,143.75 £494.71
Post-graduate Loan £21,000 £1,750.00 £403.84

Repayments are made at the rate of 9% on income in excess of the threshold for Plan 1 and Plan 2 Student loans, and at a rate of 6% on income in excess of the threshold for PGLs.

Where an employee has both a student loan and a PGL, deductions will be made at the combined rate of 15% where income exceeds the higher loan threshold.

Starting deductions

An employer will need to start making deductions in respect of a student or PGL if any of the following apply:

  • a new employee is taken on and has a ‘Y’ in the student loan box on their P45;
  • a new employee tells the employer they are repaying a student loan;
  • a new employee completes a starter checklist confirming that they have a student loan;
  • the employer receives a SL1 start notice from HMRC;
  • the employer receives a PGL1 start notice from HMRC; or
  • the employer receives a Generic Notification Service Student Loan reminder.

The employer should check they are aware of the type of loan that the employee has, confirming the loan type with the employee where necessary.

Stopping deductions

The employer should only stop making student loan deductions if they receive a SL2 stop notice or a PGL2 stop notice from HMRC; deductions should not be suspended at the request of the employee.

Where a stop notice is received, the employer should stop the deductions from the first payday from which it is practical to do so.

Paying deductions over to HMRC

The employer should pay amounts deducted from employees’ pay in respect of student loan deductions over to HMRC, together with payment of tax and National Insurance, taking care to ensure that the payment reach HMRC by 22nd month where payment is made electronically or by 19th month where payment is made by cheque.

Leavers

If an employee in respect of whom student loan or PGL repayments are being deducted leaves, the employer should enter a ‘Y’ in box 5 of the P45. This will tell the new employer to make deductions for student loan repayments. A ‘Y’ should be entered in this box even if the employee’s income is below the repayment threshold so no deductions have yet been made. An entry should not be made on the P45 if a stop notice has been received.

Partner Note: The Education (Student Loans) (Repayment) Regulations 2009 (SI 2009/470).

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