3 March 2011
How much of a termination payment is taxable depends on the nature and amount of the payment. The first £30,000 is tax free for non-contractual payments made on termination.
Pre 6 April 2011 rule
Under current HMRC
rules, if such a termination payment is paid after the P45 is
issued and exceeds £30,000, the amount over £30,000 is subject to
tax. An employer is required to operate the basic rate tax code
“BR” which means the employer must withhold tax on the amount above
£30,000 at a rate of 20% and leave the former employee to account
for any further tax due to him via the self-assessment process.
Post 6 April 2011 rule
In its recently
published booklet: "Employer Further
Guide to PAYE and NICs", HMRC has stated that on or after 6
April 2011, all employers must use tax code “0T” for amounts in
excess of £30,000 including where the payment is made after the P45
has been issued. 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 at the appropriate rate.
Employer responsibility
Ensuring that
PAYE is operated correctly is the responsibility of the employer.
Making sure that the correct amount of tax is deducted at source is
important in order to avoid the risk of HMRC imposing penalties and
interest on the employer.
Effect on compromise agreements
Many
termination payments are agreed as part of compromise agreements;
commonly payments are made after the issue of the P45 and only BR
is applied to amounts in excess of £30,000. Compromise agreements
that involve terminations on or after 6 April 2011 need to include
appropriate wording that will deal with the tax deduction
implications under the new rules. In addition any agreements
already made providing for payment after this date may need to be
checked to consider the effect of this change. For large
termination payments the effect of this change will be to
significantly reduce the immediate receipt by the employee, this
may affect negotiations.
Hill Dickinson has a wealth of experience in dealing with the full
range of employment and pensions issues. If you have any queries
relating to the above, or any other legal matter, please do not
hesitate to contact us
for advice.
