21 March 2021
Lauren Handley ACIPP, CIPP payroll advisory officer, outlines the key rules for carrying forward and amending tax codes before the first payroll calculations in the 2021/22 tax year
At tax year-end, the tax year is rolled forward in payroll software, and new tax codes must be input to the payroll system in preparation for the first payroll run of the new tax year.
When year-end activities are carried out, the question of which tax code should be used for employees could arise. Businesses may have already started receiving online P6 coding files from HM Revenue & Customs (HMRC’s) dated 6 April 2021, and, whilst it might be tempting to load these onto employee records as soon as the payroll has been rolled forward, caution must be taken.
Payroll professionals are accustomed to P6 coding notifications taking precedence over most sources within the tax year, such as the tax codes derived from forms P45 or the new starter checklist used when employees commence employment. At the beginning of a new tax year, however, the P9X notice instructions must be observed, the purpose of which are to set out the tax codes to be carried forward, those (if any) that are to be increased by specified amounts, the emergency code, and what happens when P9 or P6 coding notices are received for the new tax year.
HMRC has provided P9X information for tax year 2021/22 here: http://ow.ly/QziF30ryvpT. The instructions are as follows:
Suffix L – These codes are to have 7 units added; for example, tax code 1250L in 2020/21 will become 1257L for tax year 2021/22. (The emergency tax code for 2021/22 is 1257L.)
Suffix M – Codes with this suffix, which indicates that the person is the recipient of the marriage allowance transfer of 10% of their partner’s personal allowance, are to have 8 units added.
Suffix N – Codes with this suffix, which indicates that the person has transferred marriage allowance to their partner, are to have 6 units added.
Tax codes with suffix T or that are ‘BR’, ‘D0’, ‘D1’ or ‘0T’, are not amended via P9X instructions. Instead, they are adjusted by HMRC if necessary, via individual P9 or P6 notifications. If no amendment is received, the old tax code is carried forward into the new tax year.
...new tax codes must be input to the payroll system in preparation for the first payroll run of the new tax year.
The 2021 versions of P9X for Welsh and Scottish resident employees are also now available for employers and confirm which tax codes to change and which to carry forward for the new tax year, on 6 April 2021.
Once P9X instructions are actioned the individual P9 and P6 coding notifications for 2021/22 can be applied. These notifications must not be operated prior to the P9X increase, as otherwise this could result in employees (and pension recipients) being placed on an incorrect tax code in the new tax year, causing potential under- or overpayments of tax. It is therefore vital that payroll professionals follow the correct order of these tax sources and ensure they apply P9X instructions prior to these individual tax code amendments. If two or more such coding notices are received these are applied in date order.
It is important to note that employees leaving employment prior to 6 April do not have their tax codes amended. This is regardless of whether they receive a payment after that date. In this instance, their old tax codes will need to be used. For example, an employee paid monthly has a leaving date of 4 April 2021 and receives a payment on 28 April 2021; the tax code from 2020/21 is to be used, rather than an uplifted tax code from the P9X.
Where there is a payment after leaving, and once the P45 form has been issued, tax code ‘0T’ must be operated on the non-cumulative basis to calculate the income tax. This code would be ‘S0T’ for Scottish resident employees who had a ‘S’ prefix tax code, or ‘C0T’ for Welsh resident employees who had a ‘C’ prefix tax code.
On a final note, for any employees with a tax code which ends with a marking of ‘M1’ or ‘W1’ (for ‘month 1’ or ‘week 1’), employers should note that this marker is not to be carried forward into the new tax year. These tax codes automatically become cumulative from the start of the new tax year.
Featured in the April 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.