1. Change to PAYE on termination payments made after P45 issued (from 6 April 2011)
HMRC are amending the way in which termination payments that exceed the £30,000 tax-free threshold are dealt with by an employer if paid after the P45 has been issued.
The current treatment, which will continue to apply until 5 April 2011, is that if the termination payment is made after the P45 has been issued then the employer is required to deduct tax at the basic rate (i.e. 20%). If the former employee is subject to tax at the higher or additional tax rates then they are required to “top up” the tax via the self assessment process.
Under the new rules (except in relation to payments made in connection with employment related shares or securities, see further below), which apply from 6 April 2011, the employer is required to operate tax code 0T. This code assumes that personal allowances have been used up or reduced to nil and requires the employer to deduct tax at the relevant tax rates (i.e. 20%, 40%, or 50%). Further, the code must be operated on a non-cumulative basis, meaning that previous pay and tax details are not taken into account.
This change will not result in the employee paying additional tax but does bring forward the timing of the collection of the tax (above the basic rate) and moves the responsibility to the employer. The employer will not be required to issue a further P45 but will have to write to HMRC with details of what has been deducted.
Given that the obligation to operate PAYE correctly falls on the employer it is important that the correct amount of tax is deducted to avoid the possibility of HMRC imposing penalties and interest. In drafting compromise agreements which will encompass payments on or after 6 April 2011 it will be important to ensure that any wording dealing with deductions reflects the new rules.
Employment related shares or securities
The new rules do not apply to payments which are made in the form of:
- employment related shares or securities or interests in shares or securities, or
- employment related shares or securities options
after the employee has left the employment, in respect of which the employer should continue to deduct tax at the basic rate.
2. Change to PAYE for new employees without Form P45 and who fail to fill out Form P46
HMRC are amending the way in which employers should operate PAYE for new employees who do not have a form P45 (or do not furnish this to the new employer before the first payday) and who fail to fill out a Form P46 before the first payday.
The current treatment, which will continue to apply until 5 April 2011, is that an employer should fill out a Form P46 to the best of its knowledge (ticking checkbox C) and operate code BR on a cumulative basis.
This can result in higher paid employees paying less tax than is due and an underpayment arising at the year end.
From 6 April 2011 employers should instead operate code 0T on a cumulative basis, so that the employee will pay tax at the basic, higher and additional rate as appropriate. This code assumes that personal allowances have been used up or reduced to nil and requires the employer to deduct tax at the relevant tax rates (i.e. 20%, 40%, or 50%).
3. Change to PAYE for employees beginning to receive occupational pension benefits whilst continuing in employment
It is becoming commonplace for employees to begin receiving occupational pension payments whilst continuing in employment with their existing employer and HMRC are revising the way employers should operate PAYE in these circumstances.
The current treatment, which will continue to apply until 5 April 2011, is that employers should continue using the same tax code against the individual’s employment income until HMRC issue a new code and operate the same tax code against the pension payments on a week 1/month 1 basis.
This can result in the employee receiving more personal allowances than they should and an underpayment of tax arising at the tax year end.
From 6 April 2011 employers should instead operate code 0T against the occupational pension receipts on a week 1/month 1 basis until it hears from the Revenue.
Emma Bailey is a partner and Jaspal Pachu an Associate both specialising in tax at Fox Williams LLP. They can be contacted on firstname.lastname@example.org and email@example.com