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Changes to the taxation of termination payments will disadvantage employees
29/03/2011

From 6 April 2011 the manner in which termination payments are taxed after a P45 has been issued will change to the detriment of employees, says Stephen Brodie, Employment Partner at Brabners Chaffe Street in Liverpool.

Currently, taxable termination payments made after issue of a P45 are subject to PAYE at the basic rate with the employee having to account to HMRC for any further tax due (because they are a higher or additional rate taxpayer) through self-assessment. However, as of 6 April 2011 an employer must ensure that tax is deducted from termination payments at the appropriate rate of tax for the employee (i.e. basic, higher or additional) at the point of payment. This means that the obligation to pay the full rate of tax will shift to the employer from the employee.

The good news is that this change does not affect the £30,000 tax exemption for ex gratia payments made as compensation for loss of office and statutory redundancy payments remain tax free. However, this new system will disadvantage employees, particularly those who receive contractual payments in lieu of notice or large taxable termination or redundancy packages in excess of the statutory limit, as they will be unable to defer any payment of tax until self-assessment (often a number of months later).

HMRC recently published the Income Tax (Pay As You Earn) (Amendment) Regulations 2011 to implement these changes and has also published an updated version of its guidance, “Employer Further Guide to PAYE and NICs”. Employers should familiarise themselves with the changes to ensure that termination payments from 6 April 2011 are taxed at the appropriate rate for the particular employee at the point of payment.

Employers will also need to bear these changes in mind when negotiating employee exits between now and 5 April 2011 where the termination payment (or any part of it) is to be made on or after 6 April 2011.


For further information contact Stephen Brodie at Brabners Chaffe Street on 0151 600 3150

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