HMRC has issued new rules for the correct tax coding for termination payments, to come into effect from 6 April 2011. Under the current rules, if a termination of employment payment is made to an employee after the P45 form has been issued to the employee and the payment in question is more than £30 000, any amount over £30 000 will be taxed. The taxation amount is 20% and the code “BR” (for basic rate). The employer is required to withhold 20% of the amount over £30 000, and the former employee is responsible for any further tax that may be payable.
After 6 April 2011
From the 6th of April, employers making a termination payment after the P45 form has been issues, are required to use the tax code “0T”. This code indicates that the employee has no personal allowances and that the payment is subject to basic and higher rates of tax. The employer is required to withhold income tax at 20%, 40% or 50%, as appropriate. Ensuring that PAYE is operated correctly and that the correct tax codes are used is the responsibility of the employer and is vital in order to avoid any penalties being imposed on the former employee.