Changes to tax treatment of post-termination payments – Expert Comments

David Reid
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From 6 April 2011 important changes have been made to the rules on taxing post-termination payments operated by HMRC.

It has been confirmed that from the start of the new tax year on 6 April 2011, some important changes have been made to the rules on taxing post-termination payments operated by HMRC.

One of the most common post-termination payments is a payment under a compromise agreement. It has long been common practice for employers to issue P45s before making payments under compromise agreements, and then to deduct only basic rate tax from the termination payment, even where the employee was a higher rate tax payer.

As of 6 April 2011, it is no longer lawful to do this. If your organisation makes a payment to an ex-employee after the P45 has been issued, and the payment is subject to PAYE, you must generally deduct tax using a new 0T code, which will generally require a deduction at the employee’s marginal rate of tax and does not allow for any personal allowance.

There remains an exception for tax due on shares or options received under an employee share scheme, which can still be taxed at basic rate in most cases.

You should therefore take detailed advice on the appropriate tax treatment of these payments from your tax advisers or payroll administrators.

It should also be noted that the above change does not affect the normal rule that the first £30,000 of any non-contractual element of a termination payment is likely to be able to be paid without deduction of Income Tax.