The PAYE Income Tax (Pay as You Earn) (Amendment) Regulations 2011 come into force on 6 April 2011. From that date employers must deduct PAYE using the 0T code when making taxable payments to departing employees after they are issued with a form P45. This will affect basic rate tax payers in the main who may lose a cash flow advantage. Tax at the full 20%, 40% or 50% rates must be deducted from post termination payments. Staggered payments may not be enough to reduce PAYE liability.

At present termination payments over £30,000 are taxed only at the basic rate with higher and additional rate income tax liabilities being paid through self-assessment at a later date.