As an employer you have an obligation to provide your employees with a written payslip for each payment they receive. This doesn’t have to be a paper document, and you might provide it digitally. Payslips contain a lot of information though, and employees often find them quite confusing. It’s usually worth explaining what each bit means so your staff know what’s happening, and can identify any issues if they need to.

Absolutely, yes. You should always provide a payslip either before, or at the same time as, making a payment. This is so that employees have a record of what to expect, and can flag any errors or queries.

This includes casual workers as well as full-time employees, but it doesn’t include independent contractors or freelancers. Any workers who are employed through an agency will normally receive their pay via the agency, who will also provide the payslip. If you pay them directly then it’s your responsibility to supply one.

The payslip must be individual to each employee and kept private, so sending them out in an all-staff email is a major no-no! If you provide payslips digitally, you should make it clear to employees how they can access them.

Including key information on payslips is useful for staff so they have a clear record of how much they earn, and what deductions have been made. Some of the terminology can be a bit confusing if you don’t deal with it day to day, so we’ve included an explanation as well as a list of what to include.
 

Still with us? There might be other items to include too, such as:

• Any other variable deductions that change from payday to payday, with information on what they are.
• Payments made through a Deductions from Earnings Order issued by a court, such as to the Child Maintenance Service (CMS) or for unpaid fines or debts. Employers can also take a £1 fee for these deductions if they want to, but this must be shown and detailed separately.
• Any part payments and the details of how they are paid. For example, a cash advance with part paid directly to their bank.

There are items that you might decide to include, but they’re optional:

• Tax period: this will normally be either the week or month number in the tax year such as week 1 or month 1, with the tax year beginning on 6th April
• National Insurance number
• Employer’s pension contributions: This doesn’t affect gross or net pay, but it does show employees what benefits they are receiving on top of their pay.
• Any additional payments such as overtime or bonus. These must be included in the gross pay figure, but itemising them separately is optional.
• Gross pay-to-date in the tax year.
• Hourly rate – or any other factor that determines the amount of pay. Since April 2019 you must show the hours, days etc. worked if pay is variable on that basis. However, the hourly rate of pay is optional. You may wish to break down different rates, such as for overtime or unsociable hours.
• Breakdown of any fixed deductions, such as union fees or employer loan repayments. These can be shown as one cumulative figure if they are fixed, but in that case, you’ll also need to supply a detailed statement (annually as a minimum, but more frequently if you want to).

Every employee is given a tax code around the beginning of each tax year, or when something happens to change its status, like moving to a new employer.

To find the annual tax-free amount, multiply the numbers in the tax code by 10 (or add a “0”). For example, the standard tax code for an employee with no adjustments to it is 1257L. This represents the standard personal allowance of £12,570 for 2023/24, because this is how much an employee can earn before starting to pay tax on their income.

The “L” explains the tax code status and means that this is a normal unaltered tax code.

Are all tax codes the same?

Not always, although most employees are likely to have the 1257L tax code. The numerical part may be different for several reasons, each of which is explained by a different letter at the end.

So, if the employee has used all their personal allowance in the pay from their main employer’s tax code, the second employer may be told to apply a “0000 BR” code. This means that there is zero personal allowance applied to this employment and all the pay will be taxed at the basic rate.

Another common code is one that ends in “K”. This means that the code is effectively negative. So, the corresponding number, multiplied by 10, is added to the earnings from this employer and taxed.

One reason for this might be where another employment is not being taxed, and the earnings from it exceed the personal allowance. Another is where unpaid tax from a previous year is being collected through the PAYE system.

HMRC publish a full list of the letters in tax codes, and an explanation of what they mean.

What are emergency tax codes?

HMRC normally only apply an emergency tax code if they don’t have enough information to provide the correct code. This means that the employee will pay ‘emergency tax’, usually a higher rate, to make sure they don’t underpay.

Emergency tax codes can be shown by several different letters, and will normally be replaced as soon as the missing information is provided to HMRC.

Every employee is issued a P60 just after the end of each tax year. This is a summary of the total tax paid for that employment for the previous year.

A P45 is a bit different, and this is issued to an employee at the end of their employment. It shows the tax paid in relation to that employment in the current tax year (because it might not always helpfully be at the end of the tax year).

If you’re taking on a new employee it’s usually easier if they have a P45, but they might not always have one. This might be because they’re starting a second job, or this is their first ever employment. You can still take them on, and ask them to complete a new starter form to collect all of the information HMRC will need to assign a tax code correctly. There’s a good chance they’ll be given an emergency tax code otherwise.

As an employer, you must keep copies of all employee payslips, as well as a record of the calculations used to work them out. This includes information about each aspect of these calculations. For instance, if you pay holiday pay, you must keep a record of the employee’s leave. If the employee takes time off sick, you must have a record of when the absence started and ended, as well the details of any sick pay.

Learn more about our payroll services for businesses. Talk to the team on live chat, call 020 3355 4047, or get an instant online quote.