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Termination Payments of more than £30,000 If you have been a victim of discrimination or bullying or have suffered loss of reputation or injury to feelings, any termination payment above the standard £30,000 exemption can be tax-free depending on the circumstances. Post P45 Payments The 6th of April 2011 ushered in a new change to the PAYE regime and its treatment of termination payments, after an employee has been issued with a P45. This may have significant cash flow advantages for employees paying higher rates of tax. Post 6th of April 2011, employers should be mindful of whether it may be better to make the entire before the issue of the P45 or structure the payment on a monthly basis, post P45. Pre 6 April 2011 The Income Tax (Pay As You Earn) Regulations 2003 (the “Regulations”) govern the treatment of post-P45 termination payments through the PAYE system. Prior to 6 April 2011 if a termination payment was made after the employment had ceased and a P45 has been issued, any taxable income i.e. income which does not fall within the £30,000 exemption) was subject to the basic rate BR PAYE tax code. This meant that the employer only had to deduct 20% basic rate of tax thereby giving higher (40%) and additional (50%) rate tax payers a temporary cash flow advantage. Post 6 April 2011 With the Regulations now amended, code numbers can now take account of the 50% additional rate of income tax. Another outcome of the change is that income tax will be paid earlier than at present. When a termination payment is made after the issue of the P45 and is taxable, the employer is obliged to use the OT code (zero allowances) on a “non-cumulative” basis as opposed to the BR code. Using the OT code results in income tax being deducted at the basic, higher and additional rates depending on the relevant income level, with no personal allowance. Software providers will in most cases have made the required changes to payroll software to reflect the new OT rate applicability. These changes also apply to all taxable post-P45 awards of shares, options and other securities listed under Part 7 of ITEPA 2003. A common view is that a severance agreement should only be signed after termination in case HMRC regards the severance payment as consideration for agreeing a contractual variation and therefore taxable. The position is that provided the agreement is not signed more than two or three months prior to termination and the employee receives full notice entitlement (or a separate payment in lieu of the remainder of the notice), HMRC are likely to treat it as a non-taxable payment in connection with the termination in accordance with s.403 ITEPA 2003. The £30,000 redundancy payment exemption By Virtue of s403 (1) ITEPA 2003, the first £30,000 of any redundancy payment is exempt from tax, whether paid before or after the issue of a P45. Termination payments falling below the £30,000 threshold should not be included on the P45 and HMRC do not need to be notified. For payments above the threshold and made: on or before termination (or before the P45 is issued, if later) the taxable amount should be included in the gross pay in the P45 and the employer should notify HMRC accordingly; after termination and issue of the P45, the employer should not issue a further P45 but should use the 0T code for taxable income (i.e. income over £30,000). The employer should write to HMRC advising them of the amount and date of the lump sum and the amount of tax deducted. Reports must be written and submitted by the 6th July following the end of the tax year in which employment terminates at the latest (i.e. the same time as the P11D.) The employee should be given a copy. Does the Ex- Employee Have to Complete a Self-Assessment? The ex-employee must notify their local tax office of receipt of any termination payment that is taxable. HMRC will then decide whether a self-assessment tax return needs to be completed. Should Termination Payments be made pre or post P45? It is best for employers to make termination payments before issuing the P45, so as to avoid a basic rate taxpayer having to reclaim any overpaid taxes. As an alternative to this, post P45 payments could be paid on a monthly basis, providing a benefit to higher and additional rate taxpayers. Below is an estimate of the largest cash-flow tax benefit potentially available in a given tax year if the termination payment is paid in on a monthly basis. For an additional rate (50%) taxpayer: £20,166 For a higher rate (40%) taxpayer: £6,416 However, a basic rate taxpayer would suffer a maximum temporary disadvantage of £8,666. Please contact Tax Solicitor Fionnuala Lynch at Cubism law for further information.
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Employment (UK), Legislation, Tax, Tax post P45, tax on termination payments, Compromise Agreements, Compromise Agreements Tax,
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