The top questions and answers include tax codes, week 1 basis, employee or self employment status, national insurance, statutory sick pay and what happens when an employee does not provide a P45 from previous employment.

What is an income tax code?

An income tax code is a reference number which may also include letters or be entirely letters which determines the amount of gross pay which is free of income tax deductions and may also determine the way in which income tax should be deducted. If the tax code contains a number this number represents the amount of tax free income an employee can earn in a financial year, for example 522L means an employee has a tax free personal allowance of 5,225 pounds. A tax code of BR means all the employee gross pay should be taxed within the PAYE scheme at the basic rate of income tax.

What does week 1 of month 1basis mean?

Week 1 and Month 1 basis is an instruction to the employer operating a PAYE scheme to not calculate the income tax on a cumulative basis which is the normal basis but instead the employer has to calculate the income tax to be deducted on a non cumulative basis. A non cumulative basis is the total gross pay for that week or month excluding any previous pay in earlier pay periods regardless of whether that previous gross pay was paid by the current or a previous employer.

Because the income tax is deducted on the gross pay in a specific pay period an employee on a week 1 or month 1 basis does not receive an income tax refund in respect of previous tax deductions. Normally an employee is placed on a week 1 or month 1 basis when the tax deductions history for the current financial year are incomplete and the week 1 month 1 basis is removed when the missing history is determined

Do I deduct income tax and national insurance if a new starter says they are self employed?

The decision as to whether a worker is an employee or self employed rests with the employer responsible for the PAYE administration. If that worker is determined to be an employee then income tax and national insurance deductions must be deducted from payments made to that employee.

If the employer decides that the worker is self employed then no income tax or national insurance deductions should be made from the payments. But it is not as simple as that and any employer who has doubts should clarify the position with the local Inland Revenue helpline. A wrong decision by the employer could be very costly and strict rules are enforced.

There are numerous conditions which are applied to determine if a worker is an employee or self employed and several years after that worker joined the business the potential tax liabilities can come back to haunt the employer. The tax authority can invoke a number of conditions any one of which if proved can result in the tax authority deciding the status of a worker is that of employee and not self employed.

When the status of a worker is determined by the tax authority to be employee and not self employed the employer will incur a liability for income tax and national insurance that should have been deducted from the employee and also a liability for employers national insurance contributions. The liability being increased as the Inland Revenue will determine that the amount paid to the employee was a net wages payment after deductions and the perceived gross pay thereby enhanced.

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