On 6 April 2011 the Income Tax (Pay as You Earn) (Amendment) Regulations 2011 come into force.

At present, where an employer makes a post-P45 termination payment to a former employee the employer must only deduct tax at the basic rate (20%) using code BR on any payment not included in the P45. The rate applies regardless of whether the employee was a higher rate tax payer whilst in employment. The employee then has to declare the amount of the termination payment in his tax return for the relevant tax year and pay any further tax due.

From 6 April 2011, employers must apply a new 0T tax code to post-P45 termination payments. Depending upon the size of the payment, employers must deduct tax at the basic 20% or the higher rates of 40% or 50% whichever rate is applicable. This will not take personal allowance into account. The employee will have to reclaim any over-paid tax at the end of the tax year.

It is important employers ensure both their Payroll and HR departments are aware of the changes to the PAYE system so they can operate the 0T code if necessary