HMRC has issued instructions for correct PAYE coding to come into effect from 6 April 2011 for taxing termination payments. From that date employers who make termination payments to their employees after the P45 has been issued will have to use the "OT" code. The present system requires employers to use the "BR" code and withhold 20% of the payment - basic rate income tax - irrespective of the employee's earnings.
However, with effect from 6 April 2011, an employer making a termination payment after it has issued a P45 will have to deduct income tax at the appropriate rate, irrespective of any personal allowances available. This means that an employer must withhold income tax at 20%, 40% or 50% (as appropriate) rather than basic rate income tax of 20% under the current tax regime.
This change will affect termination payments to be made under compromise agreements completed before 6 April if the termination payment, or any part of the payment, is to be made on or after 6 April 2011.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.