From 6th April 2011 new rules were introduced to apply a new 0T tax code in relation to payments made to departing employees after the P45 had been issued. This meant that employers needed to apply the new code and deduct tax up front on the post P45 payment, at the basic 20%, higher 40% and, if necessary, the additional 50% rate of income tax. Concerns were put forward to HMRC on the introduction of the new 0T tax code in relation to share based payments. One paper was submitted by ifs ProShare, which is a not for profit organisation that promotes employee share ownership. The paper put forward concerns on how the 0T tax code could impose unfair levels of taxation on employees, increase administration of employers and the possible need for employees to sell a greater number of shares to cover the tax liability. HMRC responded at the time and confirmed that the 0T tax code would not apply to share-based payments and that employers should continue to use the BR tax code in relation to such transactions.
However, HMRC have now published draft amending regulations that would mean that from 6th April 2012, employers must revert to using the 0T tax code for all post-P45 payments, including those related to share plans. The new tax code will need to be applied on a "non-cumulative" basis. For an employee paid on a monthly basis, this means that only 1/12th of the basic rate band (and, if relevant, 1/12th of the higher rate [40%] band) is available in the month of payment. This will mean that if the termination payment is more than the appropriate proportion of the 20% band, the excess will be taxed under PAYE at 40%, and if the payment is also more than the available 40% band, the excess will be taxed under PAYE at 50%.
Employers will need to consider the effect this will have on cash-flow advantages when negotiating compromise agreements. The change would mean that there would be a cash-flow disadvantage for higher rate tax payers compared with the current regime and any over deduction of tax resulting from the application of the 0T tax code would only be corrected once a self-assessment tax return has been filed and are fund claimed.
Payroll systems will need to be updated accordingly to accommodate the change and ensure that the relevant tax is paid over to HMRC on time. Employers will also need to inform employees who are leaving about the amount of tax that will be deducted.
HMRC will hear any comments on the draft proposals up until 16th February 2012. We will publish an update on the outcome in the following month's newsletter.
If you would like further information on this issue please call us on 020 8949 5522 and ask to speak to Rebecca Mitchell.