At present, when a taxable payment is made to a departing employee after their P45 has been issued, income tax is deducted at basic rate only using a 'BR' tax code. The individual must then account for any remaining tax in his or her tax return. The effect of this is that an employee has a cash flow advantage because some of the tax due will be deferred until a later date. The current position will change from 6 April 2011.
HMRC has introduced new rules which state that from this date, employers must use an "0T" PAYE code for taxable post-P45 payments. The 0T code means that the employer must withhold income tax at the full 20%, 40% and 50% rates, depending on the employee's level of income.
For employees, this means that they will lose their cash flow advantage because the payments will be fully taxable at the time they are paid. For employers, this will mean a change to the way in which termination payments are made. From now on, full tax must be deducted by the employer at the time such payments are made, even after the P45 has been issued.