The current taxation regime for termination payments changed on 6 April 2011. Currently, where termination payments (or parts of termination payments) made after a P45 is issued are taxable, they are taxed through PAYE using the code BR, which means they are subject to the basic rate of income tax irrespective of the individual’s earnings. Therefore if the employee is a higher rate or additional rate tax payer then the further tax liability is assessed and made by way of the self assessment regime. From 6 April the PAYE code used for termination payments will be the 0T code. This means, where the termination payment is taxable, the employer will deduct tax at the employee’s own tax rate.
It is important that employers are aware of these changes, which will impact upon the tax treatment of any termination payments, including those arising as a result of any compromise agreement. Employee share plans may also be affected. Any employees receiving payments following the issuing of a P45 will also need to be aware of the changes and how it will affect their liability to income tax.