P45s don’t have to be confusing. In this Payroll Simplified blog, we cut through the jargon and explain exactly when you need to issue one, including those tricky situations where an employee hasn’t actually been paid.
What is a P45?
A P45 is the form you give to an employee when they leave. It’s officially called “Details of Employee Leaving Work” and shows how much they’ve earned and how much tax they’ve paid in the current tax year up to their leaving date.
The form has four parts.
- Part 1 goes to HMRC through your payroll software.
- Parts 1A, 2 and 3 go to the employee.
- They keep Part 1A for their records and give Parts 2 and 3 to their new employer.
The legal requirement
Under Regulation 36 of the Income Tax (Pay As You Earn) Regulations 2003, you must issue a P45 when an employee stops working for you. This applies regardless of why they’re leaving, whether they’ve resigned, been made redundant, been dismissed, or retired.
The regulation states you must complete the P45 on the day employment ends or, if that’s not practicable, without unreasonable delay.
What does “without unreasonable delay” actually mean?
HMRC doesn’t give you a specific deadline in days or weeks. But they’ve made it clear what they consider reasonable. You should issue the P45 immediately after you’ve calculated the employee’s final pay and any tax deductions.
If you’re using payroll software, this typically means the P45 is issued when processing the next payroll run after the employee leaves. If they leave mid-month and the payroll runs monthly, process their final pay and issue the P45 during that month’s payroll.
Don’t sit on it. Once the final pay has been sorted, get the P45 done.
What if the employee hasn’t received any pay?
This is where things get interesting. You might think that if they haven’t been paid anything, you don’t need to issue a P45.
The answer is yes, you probably do.
Regulation 36 applies to any employee “in respect of whom a code has been issued.” The wording here is very specific and has implications for employees on your payroll who haven’t actually worked, for whatever reason. If HMRC has issued a tax code for that employee, you need to complete a P45 when the employment ends, even if no payments were made.
But has there actually been employment if the employee hasn’t been paid? The answer is probably no from your point of view, but what about in HMRC’s eyes?
The starting point is this. Has the employee provided a P45 or completed a starter checklist? If yes, and you’ve reported that employee to HMRC on an FPS with no payments declared and the payroll has allocated a tax code on the FPS, then you should issue a P45.
Why, when HMRC haven’t technically ‘issued’ a code? Because a code number has been notified to HMRC and processed by them. HMRC now have that employee recorded as your employee.
You must issue a P45 to the employee, even if they haven’t worked or received pay.
What if the employee is on your payroll, but a code number hasn’t been allocated when an FPS is sent to HMRC? A code has effectively not been ‘issued’ unless HMRC then sends a tax code. Under the relevant legislation, you don’t issue a P45. The employee is cancelled on your software.
Why does this matter when an employee hasn’t been paid?
First, there’s the declaration to HMRC on the FPS. It’ll complicate the employee’s tax records if their ’employment’ isn’t formally notified to HMRC. Second, HMRC will continue to maintain the employment record, and you’ll need to keep sending notifications of the ’employment’ on the FPS.
It can also cause problems for the employee in their next job or when claiming benefits.
The zero earnings P45
When issuing a P45 for someone who received no pay, you simply show:
- Total pay in this employment: £0.00
- Total tax in this employment: £0.00
- Their tax code
- Their leaving date
Your payroll software should handle this automatically. You’re still required to submit Part 1 to HMRC through the Full Payment Submission and provide the other parts to the employee.
What happens if you don’t issue a P45?
If HMRC discovers you haven’t issued a P45, they’ll request it. If you don’t respond, they may send a formal request or launch an Employer Compliance investigation. Failure to provide the information can result in penalties.
For the employee, not having a P45 means their new employer might put them on an emergency tax code, which could lead to them paying the wrong amount of tax initially.
The retirement exception
There’s one important exception to the P45 rule. If someone retires on a pension and continues to receive pension income from you, this isn’t treated as a cessation of employment. You wouldn’t issue a P45 in this situation because they’re still receiving PAYE income.
Quick checklist for issuing P45s
When someone leaves:
- Process the employee’s final pay first (if applicable), including any outstanding holiday pay, bonuses, or other payments
- Complete the P45 through your payroll software
- Submit Part 1 to HMRC via the FPS
- Provide Parts 1A, 2 and 3 to the employee (electronic or paper copy) on their last day or as soon as the payroll calculations are complete
Common scenarios
Employee on notice
They work their notice period and receive their final pay on the last working day. Issue the P45 on that day or when you process that pay period’s payroll.
Employee leaves immediately
They leave without working notice but are paid in lieu. Process their payment, then issue the P45 immediately afterwards.
Employee on long-term sick leave
They’ve been off sick for months and decide not to return. Even if no pay has been made during this period, you must still issue a P45 when the employment formally ends.
New starter who never shows up
You’ve set them up on payroll, HMRC has issued a tax code, but they never actually start. You still need to issue a P45 showing zero earnings when you formally end the employment.
What if you need to make a payment after issuing the P45?
This happens more often than you’d think. You’ve processed the payroll for the final pay, issued the P45, and then you discover the employee is owed further sums. Perhaps overtime was missed, a bonus was approved late, or commission wasn’t calculated in time.
Don’t issue a second P45.
Here’s the correct process for payments after leaving:
Step 1: Process the payment through payroll
Add the employee back into your payroll system for that specific payment. Use their original leaving date and the same tax code used on their P45.
Step 2: Report it to HMRC
When you submit the next Full Payment Submission, include the payment and set the ‘Payment after leaving’ indicator. This flag tells HMRC this is an additional payment made after the employee left.
Step 3: Give written confirmation to the employee
Do not issue a new P45. Instead, you must provide the employee with written confirmation showing:
- The date of the payment
- The gross amount
- Any tax deducted
- Any National Insurance deducted
Making it simple
The payroll sector has become unnecessarily complicated in many ways. At its core, issuing a P45 is straightforward. When someone stops working, document what they earned and what tax was paid, and pass that information to HMRC and the employee.
Good payroll software handles the technical details for you. Your job is to make sure the leaving date is recorded correctly and the final calculations are accurate.
Need help with leavers and P45s?
If you’re finding payroll administration overwhelming, or you’re concerned about getting compliance right, that’s exactly what we’re here for. No jargon, no unnecessary complexity. Just decades of payroll expertise helping you get it right.
Every payroll has its quirks, and we’ll have seen your particular situations before. Whether you’re dealing with complex leaving scenarios or just want peace of mind that you’re following the rules correctly, get in touch.
